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By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 27 (Reuters) - U.S. Treasury yields fell

on Friday after data showed inflation in the world's largest

economy continued to ease, boosting the chances of an outsized

interest rate cut at the Federal Reserve's November policy

meeting.

The benchmark 10-year yield slid 3.6 basis points to 3.76%

, while the two-year yield was down 3.1 bps to 3.591%

.

The yield curve briefly steepened after the data, with the

spread between two-year and 10-year yields hitting 17 bps

. It was last at 16.3 bps. A steeper curve

suggests more interest rate cuts are underway.

Data showed the personal consumption expenditures price

index, the Fed's favored inflation measure, rose 0.1% in August

after an unrevised 0.2% gain in July. Economists had forecast

PCE inflation rising 0.1%. In the 12 months through August, the

PCE price index increased 2.2% after rising 2.5% in July.

"Friday's ... PCE data increases the likelihood that the

Federal Reserve will cut interest rates at both the November and

December meetings, as this is yet another data point showing

that there is no need for interest rates to be so much higher

than the rate of inflation," Clark Bellin, president and chief

investment officer at Bellwether Wealth in emailed comments.

The U.S. rate futures market has priced in a 54% chance of a

50 basis points cut in November, up from about 49% before the

release of the data, according to LSEG calculations. The chances

of a 25 bps move slid to 46% after the inflation data.

For the next two meetings in November and December, the

futures market now expect nearly 80 bps in policy easing.