TREASURIES-Yields pare losses as US economic outlook remain murky

By Karen Brettell

March 20 (Reuters) - U.S. Treasury yields pared an early drop on Thursday as traders remained cautious about the outlook for the U.S. economy due to uncertainty over how trade tariffs and other Trump administration policies are likely to play out.

Yields tumbled earlier in the session after Federal Reserve Chair Jerome Powell on Wednesday indicated the U.S. central bank is ready to act in the case of a slowing economy.

But Fed policymakers also noted the outlook is murky, as they projected slower growth, higher joblessness and higher inflation.

"The Fed's guidance yesterday is under such a big cloud of uncertainty that I think bond investors should really just take it with a grain of salt, because the Fed is just as unclear in its forecast as anyone else," said Will Compernolle, a macro strategist at FHN Financial.

Powell said the Trump administration's initial policies, including extensive import tariffs, appear to have tilted the U.S. economy toward slower growth and at least temporarily higher inflation.

Overall, the Fed's concerns about growth appeared to overshadow fears of a renewed surge in prices.

“The statement yesterday from the Fed and the press conference had a dovish theme to it,” said Tom di Galoma, managing director at Mischler Financial Group. “There seems to be a lot of worries at the Fed about what all these global tariffs will do and how it might slow down the economy.”

U.S. President Donald Trump plans to introduce reciprocal tariff rates on April 2.

Fed policymakers said they continue to expect to cut rates by 50 basis points this year, reducing some concerns that their projection could be reduced to only one 25-basis-point cut.

But while the median interest rate expectation remained the same, a greater number of policymakers adjusted their forecasts to include fewer rate cuts.

The Fed also said it will taper its quantitative easing program, in which it lets bonds roll off its balance sheet without replacement, which was a further boost to the bond market.

The yield on benchmark U.S. 10-year notes US10YT=RR was last down 1.9 basis points on the day at 4.237%, having dropped as low as 4.174%, the lowest since March 11. It has held in a range between 4.106% and 4.353% since February 25.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 2 basis points to 3.959%. It reached 4.107% on Wednesday before the Fed meeting statement, the highest since February 27, before dropping sharply.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened slightly to 27.5 basis points.

Data on Thursday showed that the number of Americans filing new applications for unemployment benefits increased slightly last week.

U.S. existing home sales unexpectedly increased in February as rising supply pulled buyers back into the market.

The U.S. Treasury saw solid demand for a $18 billion sale of 10-year Treasury Inflation-Protected Securities on Thursday.

The debt sold at a high yield of 1.935%, near where it was trading before the auction. Demand was 2.35 times the amount of debt on offer.

The Treasury said on Thursday it will sell $183 billion in short- and intermediate-dated debt next week, including $69 billion in two-year notes on Tuesday, $70 billion in five-year notes on Wednesday and $44 billion in seven-year notes on Thursday.