*

US 10-year yield higher, but holds in tight range

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Fed's Williams says policy in right place for now

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Fed's Goolsbee says uncertain if tariffs will lead to

persistent

inflation

(Updated in New York afternoon time)

By Karen Brettell

NEW YORK, March 21 (Reuters) - The U.S. benchmark

10-year Treasury yield rose on Friday but held in the relatively

tight range it has traded in this month as investors balanced

uncertainty over the impact of tariffs with the likelihood that

the Federal Reserve will keep rates unchanged for the time

being.

Investors are worried that tariffs will increase inflation

in the near term while also weighing on economic growth. Federal

government layoffs are also expected to lead to higher

unemployment.

So far, however, the impact of the new policies has not been

captured in the economic data. That is leaving market

participants and the U.S. central bank to largely adopt a

wait-and-see approach to where interest rates should be.

There is lack of conviction in the market, said Molly

Brooks, U.S. rates strategist at TD Securities.

Fed Chair Jerome Powell on Wednesday described the

uncertainty faced by Fed policymakers as "unusually elevated."

Yields fell earlier on Friday before drifting back higher

and adding to gains after U.S. President Donald Trump said his

top trade chief plans to speak with his Chinese counterpart next

week.

Trump reiterated his plan to use trade levies to help

narrow the U.S. trade deficit with its main economic rival, but

said there will be flexibility in tariffs. He plans to introduce

reciprocal tariff rates on countries globally on April 2.

New York Fed President John Williams said on Friday that

it's too soon to determine the impact of tariffs on inflation,

adding that there are rising risks to the economic outlook and

the central bank has time to decide the direction of its

monetary policy.

Chicago Fed president Austan Goolsbee also said that it

remains an open question whether tariffs will lead to persistent

inflation, with taxes on intermediate goods, retaliation by

other nations, and other factors feeding into whether the

central bank will have to react.

The bond market, meanwhile, has been boosted by the Fed's

plans to taper quantitative tightening, which will reduce the

Treasury Department's debt issuance needs, said TD's Brooks.

The U.S. central bank said on Wednesday that it will reduce

the pace of the drawdown of its still-massive balance sheet, as

it faces challenges in assessing market liquidity during an

ongoing impasse over lifting the government's borrowing limit.

Fed Governor Christopher Waller on Friday said he opposed

the decision because the level of reserves in the banking system

remains abundant.

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

last up 2.1 basis points on the day at 4.254%. It has held in a

range between 4.106% and 4.353% since February 25.

The 2-year note yield, which typically moves in

step with interest rate expectations, fell 0.7 basis points to

3.95%.

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

steepened by around 3 basis points to 30.3 basis

points.

Germany's Bundesrat upper house of parliament on Friday

approved plans for a spending splurge that aims to revive growth

in Europe's largest economy and scale up the military, clearing

the final hurdle for the historic policy shift.

The plan sent German government debt yields sharply higher

when it was announced earlier this month and is acting as an

upward pressure on government debt yields globally.

Traders are also watching to see if Russia and Ukraine will

agree to a deal to end their war.

President Donald Trump said on Thursday the United States

will sign a minerals and natural resources deal with Ukraine

shortly and that his efforts to achieve a peace deal for the

country were going "pretty well" after his talks this week with

the Russian and Ukrainian leaders.

The Treasury will sell $183 billion in short- and

intermediate-dated debt next week, including $69 billion in

two-year notes on Tuesday, $70 billion in five-year notes on

Wednesday and $44 billion in seven-year notes on Thursday.