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Yields fall as Fed keeps rate cut projections unchanged

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Fed tapers quantitative tightening program

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Traders watch U.S.-Russia negotiations and reciprocal tariff rates

(Updates in New York afternoon time)

By Karen Brettell

NEW YORK, March 19 (Reuters) - U.S. Treasury yields fell after Federal Reserve policymakers indicated on Wednesday they still anticipate reducing borrowing costs by half a percentage point by the end of this year, scuttling some expectations that this projection could be reduced to only one 25-basis-point cut.

Some traders had speculated that higher inflation risks posed by new tariffs could lead policymakers to adopt a less dovish outlook on rates. While the median interest rate expectation was unchanged, more policymakers did shift their projections towards fewer rate cuts.

The Fed kept interest rates unchanged, as expected, and Fed officials marked up their outlook for inflation this year. But they also marked down the outlook for economic growth, with slightly higher unemployment by the end of this year.

The Fed struck "a slightly less hawkish tone than many on Wall Street anticipated," Dan Siluk, head of global short duration & liquidity and portfolio manager at Janus Henderson said in an emailed statement.

"The downward revision to growth forecasts and the upward revision to unemployment rates have seemingly overshadowed the upward adjustment in inflation expectations," he said.

Fed Chair Jerome Powell said in comments after the Fed statement that it was too soon to determine whether the central bank will look through the impact U.S. tariffs would have on inflation, and it would be challenging to determine how much of any goods price increases are attributable to tariffs.

Fed funds futures traders are now pricing in 64 basis points of cuts by December, up from 56 basis points before the Fed's meeting statement. That indicates expectations for two 25-basis-point rate cuts this year and a rising chance of a third reduction.

The Fed also said it will reduce the pace of the drawdown of its still-massive balance sheet, as it faces challenges in assessing market liquidity during an ongoing impasse over lifting the government's borrowing limit.

The yield on benchmark U.S. 10-year notes was last down 2.9 basis points at 4.252%.

The 2-year note yield, which typically moves in step with interest rate expectations, fell 5.9 basis points to 3.983%.

The yield curve between two-year and 10-year notes steepened by around three basis points to 27 basis points.

Uncertainty over the implementation and impact of tariffs has hurt consumer confidence and sent stock markets lower, which has boosted demand for Treasuries in recent weeks and sent yields to multi-month lows.

Softer economic data have also added to concerns that the U.S. economy is facing a greater risk of a downturn even as inflation remains sticky.

"The Fed is in a situation now where it's having to balance the risks on the high side around inflation and on the low side around growth," said Jonathan Cohn, head of U.S. rates desk strategy at Nomura Securities International.

U.S. President Donald Trump plans to introduce reciprocal tariff rates on April 2.

Peace talks to end the Russia-Ukraine war also remains a focus for market participants.

Trump and Ukrainian President Volodymyr Zelenskiy agreed on Wednesday to work together to end Russia's war with Ukraine, in what the White House described as a "fantastic" one-hour phone call.

(Reporting By Karen Brettell, Editing by Franklin Paul and Rod Nickel)