(Updates to afternoon trading)

* Fed keeps interest rates unchanged

* Thirty-year yield on track for biggest gain since May

* Crude oil jump fans inflation worries

By Chuck Mikolajczak

NEW YORK, July 29 (Reuters) - Shorter-dated U.S. Treasury

yields jumped on Wednesday on a surge in oil prices before

erasing the gains and turning lower after the Federal Reserve

held interest rates steady.

The U.S. central bank left the benchmark interest rate in the

3.50%-3.75% range, a decision that drew dissents from three of

the 12 members of the policy-setting Federal Open Market

Committee who "preferred" a quarter-percentage-point hike at

this week's meeting.

The yield on the benchmark U.S. 10-year Treasury note

gained 3.5 basis points to 4.639% after climbing to

4.6549%.

"Each meeting we're now building more uncertainty around it than

the last. It looks like September now (for a rate hike), maybe

we're building to that crescendo, but we'll have to see how the

data shakes out now over the interim," said JP Powers, chief

investment officer at RWA Wealth Partners in Boston.

"Looking at the two-year (Treasury yield) before this, backing

up on a day where we have a war escalating, it really shows you

how concerned the market is that we were potentially going to

see rates moving higher today."

Yields were higher earlier in the day in part due to a surge in

crude oil prices, as major fighting in the Iran war resumed and

stoked inflation worries ahead of the Fed's rate decision.

The two-year U.S. Treasury yield, which typically

moves in step with interest rate expectations for the Fed, fell

5 basis points to 4.227% after rising to 4.339%.

Markets had been pricing in a roughly one-in-three chance of a

hike heading into the meeting, as recent economic data

indicating a cooling of price pressures conflicted with the

inflation concerns triggered by the volatility in crude prices

due to the war in Iran.

Recent comments from several U.S. officials, including Fed

Chairman Kevin Warsh, have signaled greater concern over price

pressures than the labor market, which remains on stable

footing.

HIGHER OIL PRICES

Crude prices shot up around 7% after the U.S. and Saudi Arabia

jointly struck Iran-backed armed groups in Iraq on Wednesday,

the first U.S. airstrikes in the Middle East since President

Donald Trump suspended a bombing campaign against Iran last

week.

In addition, Iran said it had fired on U.S. bases in Jordan

and at ships in the Strait of Hormuz, prompting Trump to promise

retaliatory strikes.

U.S. crude settled up 6.56% at $84.46 a barrel and Brent

settled at $90.74 per barrel, up 7.91% on the day.

The yield on the 30-year bond jumped 7.1 basis

points to 5.167% and was on track for its biggest daily gain

since May 15.

Warsh, speaking to reporters in a press conference after the

release of the Fed's policy statement, said that more forward

guidance on monetary policy decisions may be prudent in moments

of financial crisis, such as the 2008-2009 period, but it's

worth revisiting such guidance during more benign periods.

"It sounds like Warsh will take his lead from the markets. If

real yields fall, he may opt to hike. If real yields stay where

they are or rise, he can comfortably sit on his hands," said

Brian Jacobsen, chief economic strategist at Annex Wealth

Management in Menomonee Falls, Wisconsin.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a positive 41.3 basis points, its highest

since June 5.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.232% after closing at 2.171% on Tuesday, its lowest close

since November 2024.

The 10-year TIPS breakeven rate was last at

2.24%, indicating the market sees inflation averaging about 2.2%

a year for the next decade.