(Updated at 3:38 p.m. ET/1938 GMT)

By Chuck Mikolajczak

NEW YORK, July 31 (Reuters) -

U.S. Treasury yields were mostly lower on Wednesday, with

the benchmark 10-year note yield on track for its biggest drop

in two weeks, after the Federal Reserve kept interest rates at

their current levels, as was widely expected.

Yields initially moved higher after the policy statement

in which the central bank

held rates

steady, but signaled the door was open to reduce borrowing

costs as soon as its next meeting in September as inflation

draws closer to its 2% target rate.

But yields turned lower as Chair Jerome Powell spoke

after the announcement and noted that central bank

officials had

a "real discussion" about cutting rates at the July meeting

but a strong majority believed it was not the appropriate time.

"As expected, the Federal Open Market Committee decided

to keep its key interest rate, the federal funds rate,

unchanged," said Travis Keshemberg, Senior Portfolio Manager for

the systematic edge multi-asset team at Allspring Global

Investments in San Francisco.

"We believe the Federal Reserve will cut rates for the

first time this cycle at its September meeting as long as

incoming data continue to align with our expectations."

Yields were lower before the Fed statement after

economic data indicated a slowing in the labor market and wage

growth indicating the central bank has some cushion to cut rates

this year.

The ADP National Employment Report showed private payrolls

rose by 122,000 jobs this month, short of the 150,000 of

economists polled by Reuters, after advancing by an upwardly

revised 155,000 in June.

In addition, the employment cost index (ECI), the broadest

measure of labor costs, increased 0.9% last quarter, below the

1.0% estimate, after rising by an unrevised 1.2% in the first

quarter, another sign inflation is cooling.

Recent inflation data such as the consumer price index (CPI)

has fueled expectations recently the Fed will be in position to

cut rates this year.

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

fell 6.3 basis points, its fifth straight session of

declines, to 4.078% after dropping to 4.074%, its lowest level

since March 11.

The reports were on the heels of job openings data on

Tuesday that suggested a gradual slowing in the labor market and

ahead of a the key government payrolls report on Friday.

The yield on the 30-year bond was also lower for

a fifth straight session and was last down 4.9 basis points to

4.35% after hitting a six-week low of 4.342%.

Treasury said earlier on Wednesday that it does not expect

to increase auction sizes for U.S. notes and bonds over the next

several quarters, as it announced total refunding of $125

billion for the August to October quarter.

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 negative 21.4 basis points.

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

moves in step with interest rate expectations,

dropped 6.9 basis points to 4.29% after falling to 4.284%, its

lowest since February 2.

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

Inflation-Protected Securities (TIPS) was last at

2.145% after closing at 2.133% on July 30.

The 10-year TIPS breakeven rate was last at

2.235%, indicating the market sees inflation averaging about

2.2% a year for the next decade.