(Updated in New York morning time)

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Producer prices rose more than anticipated in July

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Fed seen likely to cut rates by 25 basis points in

September

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New jobless claims fell last week

By Karen Brettell

Aug 14 (Reuters) - U.S. Treasury yields rose on Thursday

after data showed that producer prices increased more than

expected in July, reducing the odds that the Federal Reserve may

cut rates by more than 25 basis points in September.

Fed funds futures traders are pricing in a near certainty that

the U.S. central bank will make a 25-basis-point cut next month

as the labor market slows. Relatively benign consumer price

inflation for July has added to this view.

In recent days traders had also begun to speculate that a larger

cut may be on the table if the jobs data for August is weak,

though the producer price data released on Thursday makes this

scenario less likely.

"It tempers some of those expectations or thoughts of the Fed

potentially moving in a larger than 25-basis-point increment as

their first move," said Angelo Manolatos, macro strategist at

Wells Fargo in Charlotte.

"With PCE (Personal Consumption Expenditures) likely coming in

on a core basis about 0.3% at the end of this month, the Fed can

still very well cut 25 basis points in September. But there's

still a lot of data between now and then."

The Producer Price Index for final demand jumped 0.9% last month

after being unchanged in June, the Labor Department's Bureau of

Labor Statistics said on Thursday. Economists polled by Reuters

had forecast the PPI would rise 0.2%.

Other data showed that the number of Americans filing new

applications for jobless benefits fell last week amid low

layoffs, but a reluctance by businesses to boost hiring because

of softening domestic demand could drive the unemployment rate

to 4.3% in August.

The 2-year Treasury note yield, which typically moves

in step with Fed interest rate expectations, was last up 3.9

basis points on the day at 3.726%. It earlier reached 3.655%,

the lowest level since May 1.

The yield on benchmark U.S. 10-year notes rose

2.2 basis points to 4.262%.

The yield curve between two-year and 10-year notes

flattened by around 2 basis points to 53.5 basis

points.

Treasury Secretary Scott Bessent on Thursday said conditions now

appear more favorable for a rate cut, and that the Fed could

"start with 25 (basis points) and then accelerate."

Bessent said on Wednesday that "there's a very good chance," of

a 50-basis-point cut at the U.S. central bank's September 16-17

policy meeting.

San Francisco Fed President Mary Daly, meanwhile, pushed back

against the need for a 50-basis-point cut, saying that "I'm

worried it would send off an urgency signal that I don't feel

about the strength of the labor market."