TREASURIES -US yields dive after Fed's Powell's dovish turn in Jackson Hole

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 22 (Reuters) - U.S. Treasury yields dropped across the board on Friday after Federal Reserve Chair Jerome Powell alluded to a possible interest rate cut at the central bank's September meeting but stopped short of committing to it.

He acknowledged the growing risks to the job market and also said risks of higher inflation remain.

"While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers," Powell told an audience of international economists and policymakers at the Fed’s annual conference in Jackson Hole, Wyoming.

"This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly," he said, before touching on inflation risks and going on to add: "With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."

In late morning trading, U.S. two-year yields, which are tied to the Fed's monetary policy, fell 11.5 basis points (bps) to 3.677% US2YT=RR, on track for its largest daily fall since August 1. The yield earlier fell to a more than one-week low of 3.675%.

The benchmark 10-year yield also fell to a one-week low and was last down 86 bps to 4.246% US10YT=RR, its biggest one-day decline in three weeks.

"Powell's Jackson Hole speech was more dovish than many expected...(but he) wouldn't say something this explicit unless a cut in September was almost assured. It would take a very big surprise in the data to prevent at least one cut," said Tom Graff, chief investment officer, at Facet in Phoenix, Maryland.

"This tells us that Powell is quite confident that tariffs will be causing a one-off increase in prices. We saw in the CPI and PCE inflation reports that goods prices have started to rise. Powell is telling us that given the weakness in labor, he's willing to look past that."

The yield curve steepened after Powell's remarks, with the gap between two-year and 10-year yields hitting 58.1 bps US2US10=TWEB, the steepest level since mid-July. It was last 56.8 bps, compared with 53.2 bps late on Thursday.

The steepening suggested that traders are pricing an imminent rate cut from the Fed.

Post-Powell, U.S. rate futures market priced in an 89% chance the Fed will cut rates in September, according to the CME's FedWatch, up from 75% on Thursday. Rate futures have also factored in about 58 bps of easing this year. At one point on Thursday, futures showed just 48 bp of rate declines for 2025.

Also on Friday, U.S. President Donald Trump said he would fire Federal Reserve Governor Lisa Cook if she doesn't resign.

Cook, the first Black woman to serve on the Fed board, said she had "no intention of being bullied to step down" after Trump on Wednesday called for her resignation on the basis of allegations about mortgages she holds in Michigan and Georgia.