TREASURIES-Prices dip before Fed meeting, inflation tame
* Prices fall ahead of Wednesday's FOMC announcement
* Low inflation seen complicating Fed lowering purchases
* Fed to buy $1.25 bln-$1.75 bln bonds due 2036-2043
NEW YORK, June 18 (Reuters) - U.S. Treasuries prices fell on Tuesday after consumer price data came in slightly weaker than expected and as investors looked ahead to a meeting of the Federal Reserve for clarity about how close the U.S. central bank is close to paring back its bond purchases. The U.S. Consumer Price Index edged 0.1 percent higher on Tuesday, slightly weaker than analysts polled by Reuters expected, though price pressures showed signs of stabilizing after a long decline. The price data is seen as unlikely to sway the Fed from its likely course of paring back its bond purchases, though low inflation is seen as complicating Fed policy as long as it stays below its targets. "The CPI number was a disappointment to a very mild consensus. Some components to core are resuming their strength and that does tend to lend some credence to the fact that it will be stable, but stable at these levels is still missing the Fed's mandate," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York. Market gauges of future inflation have tumbled amid a broad bond selloff since Fed Chairman Ben Bernanke said on May 22 the Fed may decide to pare its purchases in the next few meetings if the economy's recovery maintains momentum. The Fed's policy statement, expected on Wednesday, has gained greater importance since this statement. It will be followed by a news conference with Bernanke. Many economists see the economy on a stronger footing that will enable to Fed to pull back some of its stimulus, but low inflation that is running well below the Fed's target of 2 percent poses a potentially large problem for the U.S. central bank if it continues to decline. Inflation expectations as measured by breakevens on five-year Treasuries Inflation-Protected Securities (TIPS) have dropped to 1.83 percent on Tuesday, down from around 2.40 percent in March. "It's very complicated for the Fed, on the one hand their policies aren't having a huge impact on economic growth going forward, on the other hand they need to maintain the ability to act in case deflation does occur," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. Investors have been rocked by confusion over how close the Fed is to paring back its purchases, with yields surging after Bernanke's comments in huge volumes and volatility rising to its highest levels in almost a year. A number of traders and investors are concerned that the bond purchases are creating market dislocations that will make an exit harder and add to risks that the Fed will create new asset price bubbles. After four years of throwing money at the economy, some fear that the stimulus is producing increasingly fewer returns amid these risks. "The buying becomes not useful at a certain point, it has declining utility. The ugly scenario for the Fed is that inflation expectations continue to deteriorate and there's nothing they can do about it," said LeBas. The Fed will buy between $1.25 billion and $1.75 billion in bonds due from 2036 to 2043 on Tuesday as part of its ongoing purchases. Benchmark 10-year Treasuries were last down 5/32 in price to yield 2.21 percent. The yields have fallen from 2.29 percent last Tuesday, a high of more than 13 months, but remain significantly higher than about 1.60 percent in early May. Thirty-year bonds fell 6/32 in price to yield 3.37 percent, down from 3.43 percent last Tuesday, also a high of more than 13 months and up from 2.82 percent at the beginning of May. Expectations of future volatility in government bonds remained elevated near one-year highs. The Merrill Lynch MOVE index, which estimates future volatility of long-term bond yields was at 78.5 on Tuesday, just below an 11-month high of 84.7 last Monday, and up from a multi-year low of around 50 at the beginning of May.