TREASURIES-US yields ascend after Fed signals slower rate cut pace in 2025

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US 10-year yield hits 7-month high; 2-year rises to 3-week peak

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US 2/10 yield curve flattened after rate decision

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Fed dots show two cuts in 2025

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US rate futures show just one cut

(Adds Fed's Powell's remarks, more analyst comment, adds graphic, updates prices with milestones)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 18 (Reuters) - U.S. Treasury yields surged on Wednesday after the Federal Reserve lowered interest rates by 25 basis points (bps), as widely expected, but flagged a slower pace of easing next year amid a persistently stable labor market and inflation that has become stickier than normal.

In afternoon trading, the U.S. 10-year yield hit its highest since late May of 4.51% after the rate decision and was last up 10.7 bps at 4.492%. The yield posted its best daily gain in about five weeks.

U.S. 30-year yields also advanced, climbing to a four-week peak, and were last up 6.9 bps at 4.648%, the largest one-day gain since Nov. 12.

On the front end of the curve, the two-year yield, which is sensitive to the interest rate outlook, gained 9.4 bps to 4.336%, after earlier hitting a new three-week high after the Fed statement. The yield had its biggest daily rise in more than two months.

The benchmark policy rate is now down to the 4.25%-4.50% range. In its latest policy statement, the Federal Open Market Committee said "economic activity has continued to expand at a solid pace," with an unemployment rate that "remains low" and inflation that "remains somewhat elevated."

The decision, however, was opposed by Cleveland Fed President Beth Hammack, who preferred to leave the policy rate unchanged.

Analysts said this suggested a likely pause at the next meeting in January. After the Fed statement, U.S. rate futures priced in a 94% chance of the Fed holding rates steady next month.

U.S. central bankers on Wednesday also released new estimates on rate forecasts, also known as the "dot plot," which called for two quarter-point rate cuts next year. That mirrored what the futures market has been showing over the last two weeks.

In the September meeting, in which the Fed cut by 50 bps, the dot plot showed rates at 3.4% by the end of 2025, or about 100 bps of easing.

Fed Chair Jerome Powell doubled down on the central bank's statement about slowing the pace of easing.

"From this point forward it's appropriate to

move forward cautiously

and look for progress on inflation ... from now we are in place where the risks are in balance," Powell said in a press conference after the end of the central bank's two-day policy meeting.

Powell described the latest rate cut as a "closer call" and noted that the slower pace of projected rate cuts next year reflected higher inflation readings in 2024.

"Stronger expected growth married with higher anticipated inflation - it's no wonder the Fed reduced the number of expected rate cuts in 2025. The results of this meeting raise the question: if the market wasn't expecting a rate cut today, would the Fed actually have delivered one? I suspect not," said Jack Mcintyre, portfolio manager at Brandywine Global, in emailed comments.

"The Fed has entered a new phase of monetary policy, the pause phase. The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025."

The U.S. yield curve flattened after the Fed decision, with the spread between two- and 10-year yields last at 14.4 bps, from 15 bps late on Tuesday. The flattening reflected that with the Fed set to slow the pace of rate cuts, the two-year yield has a little more room to rise.

The Fed's lower rate forecasts for the next two years are "a signal for markets to continue to price in even fewer than two and possibly move in the direction of none if the data comes in strong enough," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

"The Fed is not willing to keep cutting if they don't see inflation coming down enough, and their summary of economic projections suggested that they still expect inflation at two and a half percent on core PCE by the end of next year."

Post-Fed, U.S. rate futures have priced in just 32 bps in cuts for 2025, down from 49 bps immediately after the Fed statement.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Brettell; Editing by Jonathan Oatis, Chizu Nomiyama and Andrea Ricci)