*

Powell says strong economy allows caution, Musalem warns

about

unclear path of rate cuts

*

Markets focus on upcoming jobs data, CPI

*

ADP employment slight below expectations, ISM shows

slowing

services activity

(Updates to mid-afternoon trading)

By Tatiana Bautzer and Chuck Mikolajczak

NEW YORK, Dec 4 (Reuters) -

U.S. Treasury yields fell on Wednesday, reversing course

after softer economic data offset Federal Reserve officials'

comments, and markets continued to price in a 25-basis point

interest rate cut in the U.S. central bank's December meeting.

Yields initially rose after St. Louis Federal Reserve

President Alberto Musalem said inflation could take up to two

years to get to the central bank's target and that the pace of

future actions has grown less clear.

However, the ADP National Employment Report showed

private payrolls rose by 146,000 jobs last month, compared with

the 150,000 estimate of economists polled by Reuters. The U.S.

services sector activity slowed in November after posting big

gains in recent months, according to the Institute for Supply

Management survey on Wednesday.

Fed Chair Jerome Powell also said earlier on Wednesday

that

the economy is stronger than it had appeared in September

, making policymakers potentially more cautious about

lowering rates further. His remarks were likely his last before

a quiet period for Fed officials prior to the Dec. 17-18 meeting

beginning on Saturday.

Fed Governor Christopher Waller said on Monday he was

"leaning toward" a cut, but others did not commit to the

outcome.

"Markets are still expecting a 25-basis points rate cut

in December, but the CPI and nonfarm payrolls will have their

say," said Vail Hartman, analyst at BMO Capital Markets in New

York.

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

fell 3.7 basis points to 4.184%. The two-year

yield, which typically moves in step with interest

rate expectations, fell 3.9 basis points to 4.132%.

The U.S. Treasury yield curve between two and 10-year

notes, an indicator of economic expectations,

steepened to 4.8 basis points.

Yields extended declines after far-right and left-wing

lawmakers

joined forces

to back a no-confidence motion against French Prime

Minister Michel Barnier and his government, pushing the

European Union's second-biggest economic power deeper into a

political crisis.

Nonfarm payrolls in November will be unveiled on Friday. The

consumer price index data will be released next Wednesday. The

odds of a 25-basis points rate cut were at 75.7%, according to

CME's FedWatch tool.

Jim Barnes, director of fixed income at Bryn Mawr Trust

in Berwyn, Pennsylvania, said yields have been volatile over the

last week sessions, as investors followed comments from Fed

officials.

"That said, I thought the ADP data came in somewhat benign;

the most important jobs data will come on Friday."

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

Inflation-Protected Securities (TIPS) was last at

2.379% after closing at 2.395% on Tuesday.

The 10-year TIPS breakeven rate was last at

2.287%, indicating the market sees inflation averaging about

2.3% a year for the next decade.