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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.