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By Stefano Rebaudo

May 8 (Reuters) - Euro zone government bond yields edged

higher on Thursday after the U.S. Federal Reserve warned about

the risks of higher inflation and unemployment, with investors

now looking towards the Bank of England's monetary policy

meeting later in the day.

The Fed held interest rates steady on Wednesday but said those

risks clouded the U.S. economic outlook as policymakers grapple

with the impact of President Donald Trump's tariffs.

Germany's 10-year yield, the euro area's benchmark,

rose 0.5 basis points (bps) to 2.48%. It hit 2.556% on Tuesday,

its highest level since April 14.

"While the Fed sees increased risks to both employment and

inflation, this assessment is probably obvious given the tariff

backdrop," said Hauke Siemssen, rate strategist at Commerzbank.

"More insightful were (Fed chair Jerome) Powell's repeated

remarks that there is no real cost to waiting as the labour

market is still doing well while inflation has come down," he

added, arguing that markets did not interpret this as overly

hawkish.

U.S. Treasury yields edged higher, with the 10-year

up 2.0 bps at 4.29% after dropping the day before, while the

policy-rate sensitive 2-year yield was roughly

unchanged.

Money markets priced in a European Central Bank deposit

facility rate at 1.6% after falling to below 1.55% in mid-April

as the ECB suggested it was ready to cut rates in response to

the potential adverse impact of U.S. tariffs.

German 2-year yields, more sensitive to European

Central Bank policy rates, rose 1.0 bp to 1.74%.

The BoE is expected to lower rates by 0.25 bps, and some

economists think it will soon need to speed up its gradual

approach to rate cuts. Citi expects the British central bank to

validate the recent scaling back of rate cuts priced into

derivatives markets "rather than push it any further".

Markets are currently pricing 95 bps of monetary easing by

December from 145 bps at the end of March before the

announcement of U.S. tariffs by Trump. Some analysts argued the

BoE could end up more hawkish than expected as hard economic

data shows no signs of a deteriorating outlook and the impact of

tariffs will be small since the UK has limited exposure to U.S.

goods demand.

Italy's 10-year yield was up 1.0 bp at 3.57%,

leaving the spread between it and Germany's Bund yield - a

market gauge of the risk premium investors demand to hold

Italian debt - at 104 basis points.