NEW YORK, Aug 14 (Reuters) - U.S. Treasury yields popped

higher after a July U.S. consumer inflation reading came in as

benign as predicted, smoothing the way for a Federal Reserve

interest rate cut next month of at least 25 basis points,

although a more aggressive 50 bps cut looks less likely.

The odds of a rate cut at the Fed's Sept. 17-18 policy

meeting had been nearly split between half a percentage point

and 25 bps before the Labor Department reported its Consumer

Price Index increased 0.2% last month after falling 0.1% in

June, and increased 2.9% year-on-year, less inflationary than

June's 3.0% advance. Futures moved slightly in favor of a 25 bps

cut after the report, with odds at 58.5% according to LSEG

calculations.

Economists polled by Reuters had forecast the CPI increasing

0.2% on the month and 3.0% over 12 months.

Yields clawed back some of what they lost on Tuesday after

the government reported a mild increase in July producer prices.

"The market is thinking that inflation is a little bit more

sticky than the Fed was expecting, and they're penciling out

some of that 50 basis point pricing," said Gennadiy Goldberg,

head of U.S. rates strategy at TD Securities in New York.

"Other than that, I think this really checks the box for the

Fed to go in September. And of course, the big question for the

market is going to be 25 or 50, and I suspect that's going to be

determined over the next couple of weeks."

Traders are still pricing in a full percentage point of

easing from the current 5.25% to 5.5% fed funds rate by

year-end. The policy rate has not changed since July 2023 after

the Fed hiked from zero starting in March 2022.

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

off 0.2 basis point from late Tuesday at 3.852%, but about 2 bps

higher than where it stood before CPI. The 2-year note yield

, which typically moves in step with interest rate

expectations, was up 3.7 basis points to 3.9787%.

The 30-year bond yield fell 2.6 basis points

from late in the previous session to 4.1403%.

The closely watched gap between yields on two- and 10-year

Treasury notes, considered a gauge of growth

expectations, was at negative 12.9 bps, slightly more inverted

than its reading of -9.2 bps late Tuesday. An inverted yield

curve is generally seen as pointing to a recession.

Hopes of an aggressive 50 bps easing in September briefly

shifted the gap between 2- and 10-year yields to a positive 1.5

bps last week, the first time the curve showed a more normal

upward slope since July 2022.