Powell shrugs off bond yield surge, but says 'we're watching'

Nov 7 (Reuters) - The recent surge in U.S. Treasury yields has less to do with a concern in the bond market over inflation risks arising from an aggressive fiscal agenda from President-elect Donald Trump than they do about expectations for stronger growth ahead, Federal Reserve Chair Jerome Powell said on Thursday, but central bank officials will keep a close eye for any change in that dynamic. In the weeks between the Fed's first interest rate cut in September and a second one announced on Thursday, yields have risen to their highest levels since mid-summer - an unusual behavior given the Fed is now lowering rates and expects to continue doing so into next year.

Yields on 2-year Treasury notes, which ordinarily track Fed policy expectations, have climbed by more than 65 basis points since the central bank's 50-basis-point rate cut on Sept. 18, and benchmark 10-year Treasury note yields, influenced more by growth and inflation expectations, are up by 70 basis points.

Asked at a press conference following Thursday's second cut of 25 basis points whether he found the bond market's behavior concerning at all, Powell said "It appears that the moves are not ... principally about higher inflation expectations."

"They're really about a sense of more likely there is stronger growth and perhaps less in the way of downside risks," Powell said.

The Fed does take financial conditions into account in policy-making "if they are persistent and they're material," Powell said. "But I would say we're not ... at that stage right now. It's just something that we're watching."

Related measures in the bond market of inflation expectations have moved higher alongside the yield increase, however.

The breakeven-inflation yields on 5-year Treasury Inflation-Protected Securities, for instance, have climbed to their highest in more than six months. They have snapped higher after finally returning to below 2% - the level of the Fed's inflation target - during August and September as confidence had grown that the Fed's rate hikes had tamed inflation.

Powell also said he was not overly concerned - yet - about that increase.

"We would be concerned if we saw, if you thought we saw, longer-term inflation expectations anchoring at a higher level, that's not what we're seeing," he said.

(Reporting by Dan Burns; Editing by Andrea Ricci)