(Updates prices, adds)

Sept 18 (Reuters) - Italy's bond yield fell below

France's for the first time on Thursday, while euro area

borrowing costs edged up, having offered little reaction to the

Federal Reserve's decision to leave its interest rate outlook

largely unchanged.

The U.S. central bank's decision to reduce rates by 25 basis

points fell far short of the steep cut President Donald Trump

had demanded, and which was apparently pencilled into

projections submitted by new Fed Governor Stephen Miran, who

cast the only dissenting vote against the policy decision.

Markets showed a muted initial response to the Bank of England's

decision to keep rates unchanged on Thursday and to slow the

pace of its quantitative tightening programme.

The release of stronger U.S.

employment data

in the European afternoon pushed up the dollar and

triggered a broader sell-off in longer-dated bonds, analysts

said.

Germany's 10-year government bond yield, the

benchmark for the euro zone bloc, was up 3.8 basis points at

2.715%.

Market pricing for Fed rate cuts was little changed from

pre-meeting levels, with traders still expecting 44 basis points

of easing by the end of this year and 122 bps by the end of

2026. The current federal funds target range stands at

4.00%-4.25%.

ECONOMISTS THINK MARKET PRICING HAS GONE TOO FAR

However, economists still think the market pricing has gone

too far in the Fed's monetary easing path.

"Rates are unlikely to fall further from there, as solid growth

drives a rebound in labour market activity and causes inflation

to rise," said David Rees, head of global economics at

Schroders ( SHNWF ), after noting that he expects the Fed to deliver two

more quarter-percentage-point cuts by the end of this year.

"As such, we continue to believe that market expectations of

rates going below 3% are too aggressive," he added.

U.S. Treasury prices fell after the weekly unemployment data,

which pushed yields up 4.8 bps to 4.122%.

Analysts suggested that Miran's lone dissent was no accident,

but rather a calculated move by the rest of the policy-setting

Federal Open Market Committee to show unity behind Fed Chair

Jerome Powell and reinforce the central bank's institutional

independence.

The yield gap between safe-haven Bunds and 10-year French

government bonds - a market gauge of the risk

premium investors demand to hold French debt - was at 80 bps,

not far from its six-month high of around 84 bps.

Italy's 10-year yields rose in line with those

on the broader debt market, last up 4.4 bps at 3.54%. France's

OAT yields stood at 3.52%, up 3.4 bps on the day.

Italy's 10-year yields dropped for the first time below France's

earlier on Thursday.

Markets are pricing in a 45% chance of a 25-bp rate cut by the

European Central Bank by June 2026, which

would bring its deposit rate to 1.75%. The key rate is seen at

1.95% by December 2026.

Germany's 2-year yields, more sensitive to

expectations for ECB policy rates, were flat at 2.0%.