TREASURIES-US Treasury yields pare rise as Powell sees continued inflation progress

(Updated in New York afternoon time)

By Karen Brettell

NEW YORK, Jan 29 (Reuters) - U.S. Treasury yields reversed an earlier rise on Wednesday after Federal Reserve Chair Jerome Powell said he expects to see further progress on inflation even as the U.S. central bank removed language from its latest policy meeting statement that had acknowledged easing inflation.

The Fed dropped language saying inflation "has made progress" towards its 2% inflation goal, noting only the pace of price increases "remains elevated."

The change "acknowledges that inflation remains above the Fed's target and may be leveling off above the target rate," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Pittsburgh.

Powell told a press conference after the meeting statement that the Fed wants to see further progress on inflation and could see a pathway for that, noting, for example, that shelter inflation is steadily falling.

Powell also said that the Fed doesn't need inflation to fall to its 2% annual target before cutting interest rates.

Traders are pricing in around 46 basis points of cuts by year-end, down from around 48 basis points before the Fed statement. That reflects falling confidence that the U.S. central bank will make two 25 basis point rate reductions this year.

The Fed kept interest rates steady on Wednesday, as was widely expected.

The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last up 2.1 basis points on the day 4.226%. It got as high as 4.263% after the Fed statement.

Benchmark 10-year yields fell 0.2 basis points to 4.547% after earlier reaching 4.593%.

The yield curve between two-year and 10-year yields was at 33.6 basis points.

Stronger economic growth and uncertainty over the impact of policies including tariffs expected to be implemented by U.S. President Donald Trump's administration has led traders to pare expectations on how many more times the U.S. central bank will cut rates.

Powell said that it is too soon to say what Trump's policies will do and the central bank will

take its time

assessing what the new government policy regime means.

Powell also said that the central bank still

has room to run

with shrinking the size of its balance sheet, saying that banking system reserves remain "abundant" and the central bank still has solid control of the federal funds rate.

Data on Wednesday showed that the U.S. trade deficit in goods

widened sharply in December

, as businesses front-loaded imports in anticipation of broad tariffs from the Trump administration.

That has raised speculation the government's advance GDP estimate for the last quarter on Thursday could be weaker than previously thought, said Thomas Simons, chief U.S. economist at Jefferies in New York.

"There's a lot of people marking down their expectations," he said.

Still, Simons noted that strong imports should also raise inventories, which may have an offsetting impact on the GDP data.

(Reporting by Karen Brettell; Additonal reporting by Sin?ad Carew; Editing by Richard Chang and Deepa Babington)