TREASURIES-US yields drop as Fed cites elevated inflation, unemployment risks

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Fed keeps rates steady in 4.25%-4.50% range

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US yield curve flattens, last at 48.6 bps

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US rate futures price in Fed cut in July

(Adds fed funds futures, analyst comment, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 7 (Reuters) - U.S. Treasury yields fell on Wednesday after the Federal Reserve held interest rates steady as expected, but noted that the risk of higher inflation and unemployment has increased.

The benchmark 10-year yield fell further to 4.267%, down 5.1 basis points (bps). The two-year yield , which reflects interest rate expectations, slid 2.5 bps to 3.768%.

The Federal Reserve's policy-setting Federal Open Market Committee kept the central bank's benchmark interest rate steady in the 4.25%-4.50% range, but pointed to economic uncertainty amid

mounting risks

of elevated inflation and joblessness.

"The Committee is attentive to the risks to both sides of its dual mandate," the FOMC said in its statement.

"For the time being, the Fed remains in a holding pattern as it waits for uncertainty to clear," wrote Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management in New York, in emailed comments.

"Recent better-than-feared jobs data has supported the Fed's on-hold stance, and the onus is on the labor market to weaken sufficiently to bring a resumption of its easing cycle. Any weakening in the labor market, however, could take a number of months to become apparent and we see the odds skewed towards another 'hold' at next month's meeting."

The U.S. Treasury yield curve flattened following the Fed statement, with yields on the long end lower than those on the front end, suggesting that the Fed is unlikely to ease at the next meeting in June.

The spread between two-year and 10-year yields narrowed to 49.1 basis points on Wednesday, compared with 51 bps late on Tuesday. Typically under the Fed easing cycle, the curve generally steepens, with yields on short-dated Treasuries tethered to rate cuts.

Following the Fed statement, the benchmark federal funds futures market has priced in a more than 70% chance that the U.S. central bank will resume its rate cuts at its July 29-30 policy meeting, according to LSEG calculations. It also sees about 82 bps of easing this year. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Will Dunham and Deepa Babington)