TREASURIES-Yields retrace earlier rise as Fed sees 3 hikes this year

(Updates prices, adds quote)

* Fed policy makers largely split over need for 3 or 4 rate hikes

* Two-year yield hits highest since September 2008

* U.S. trade deficit widens in fourth quarter

NEW YORK, March 21 (Reuters) - U.S. Treasury yields were slightly lower on Wednesday after the Federal Reserve raised interest rates and forecast two more hikes for 2018, fewer than the three that many market participants had expected. Policymakers were largely split as to whether a total of three or four rate hikes would be needed this year in their rate projections, known as the dot plot because the outlooks are plotted on a chart. They predicted rates would rise three times next year and two times in 2020. There was "no change to 2018 and I think thats why you have such a muted reaction," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York. A jump in consumer prices in January increased expectations for four rate hikes in 2018, though Februarys consumer price index last week showed prices cooled that month. However, one more dot shift and we would have gotten the expectation for four rate hikes this year, so they were pretty close to moving in that direction, said Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research in New York.

Two-year note yields , which are highly sensitive

to interest rate policy, jumped as high as 2.366 percent, the highest since September 2008, before falling back to 2.308 percent.

Benchmark 10-year note yields increased to 2.936

percent, the highest since March 12, before retracing to 2.894 percent. Concerns about rising bond supply as the government faces a widening trade deficit and plans higher budget spending has also been weighing on the market this year. More money for border security and fighting Russian election hacking was expected to be included in a $1.3 trillion U.S. government spending bill taking shape in Congress. On the economy, data on Wednesday showed the trade deficit widened to $128.2 billion in the fourth quarter. A worsening deficit is seen as a likely drag on growth. The recent trade data that we got show huge deficits, which is going to feed into first-quarter GDP, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. Investors are also focused on how international countries are responding to U.S. plans to impose trade tariffs. Yields briefly dipped earlier on Wednesday after The Wall Street Journal reported that China is planning countermeasures against U.S. trade tariffs.

(Additional reporting by Kate Duguid in New York Editing by Leslie Adler and James Dalgleish)