*

Fed's Powell says "time has come" to cut rates

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U.S. rate futures price in higher odds of 50 bps cut in

Sept

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U.S. 2-year, 10-year yield on pace for biggest daily fall

in

three weeks

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U.S. 2/10 yield curve bull steepens as easing priced in

(Adds new comment, Fed's Goolsbee's remarks, graphic, updates

prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 23 (Reuters) - U.S. Treasury yields sank

across the board on Friday after Federal Reserve Chair Jerome

Powell, in prepared remarks, delivered his strongest signal yet

that interest rates are coming down most likely at the next

policy meeting in September.

The benchmark 10-year yield fell 6.1 basis points (bps) to

3.801%. It was on track to post its largest daily

decline in nearly three weeks.

U.S. 30-year yields slid 4.2 bps to 4.094%.

On the short end of the curve, the two-year yield, which

reflects interest rate expectations, dropped 9.7 bps to 3.913%

, on pace for its biggest daily fall since Aug 2nd.

In a highly-anticipated speech, Powell said "the time has

come" for the Fed to cut interest rates amid rising risks to the

job market even as inflation was in reach of the U.S. central

bank's 2% target. He spoke at the Kansas City Fed's annual

economic conference in Jackson Hole, Wyoming.

"The direction of travel is clear, and the timing and pace

of rate cuts will depend on incoming data, the evolving outlook,

and the balance of risks," Powell said.

Traders increased bets for a bigger rate cut in September

following Powell's speech, with the fed funds futures now

pricing in a 37% chance of a 50-bp cut next month, up from about

25% late on Thursday. Traders are also pricing in about 106 bps

of cuts by the end of the year.

"Powell very confidently ratified what the market is pricing

in...It was also very clear from his speech that there's more

focus on the labor market more than inflation going forward,"

said Vishal Khanduja, co-head of Broad Markets Fixed Income at

Morgan Stanley Investment Management in Boston.

He added that the disinflationary trend in the economy

remained intact, with inflation heading towards the Fed's 2%

inflation target

"Until now, the question was: when is the first cut,

with the cut being very data-dependent. Now I think they're

tying the data dependence to the pace and magnitude of cuts

going forward. That's a slight shift there."

Chicago Fed President Austan Goolsbee, who is not a

voter this year on the Federal Open Market Committee, also added

to Powell's dovish rhetoric on Friday. He said monetary policy

is

quite tight

and is no longer aligned with current economic conditions.

(Powell's) speech was cautiously optimistic, suggesting

that inflation is on a sustainable path back to the target

without necessitating a sharp increase in unemployment," wrote

Dan Siluk, head of global short duration and liquidity at Janus

Henderson, in emailed comments.

"This may reassure investors about the potential for a

soft landing. Risk markets - equities and credit - are firmer

after the speech."

Following Powell's unequivocal signal, the U.S. yield curve

bull-steepened, or narrowed its inversion, with the yield spread

between two- and 10-year notes at falling to as low as minus 9.9

bps, the tightest gap in a week, and down from minus 15.8 bps

late on Thursday. The curve briefly turned positive on Aug. 5.

A bull steepener, a scenario in which short-term rates are

falling more steeply than the long end, typically foreshadows a

Fed easing cycle. The belief is that yields on the front end of

the curve have peaked as the expected next move by the Fed is to

cut rates.