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TREASURIES-U.S. benchmark yields fall as Fed delivers slightly dovish rate hike

Cynthia Osterman)

hike@ (Recasts with Fed decision, adds quotes, updates prices) Fed revises rate projections for 2019 to two, from three

* Fed says "some" further gradual rate hikes needed

* Two-year, 10-year yield curve flattens

NEW YORK, Dec 19 (Reuters) - U.S. benchmark Treasury yields fell to more than six-month lows on Wednesday after the Federal Reserve lowered projections for rate hikes next year but did not deliver as dovish a statement as some investors had expected. The U.S. central bank raised interest rates and noted that "some" further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs. Fresh economic forecasts released on Wednesday showed policymakers expect two rate hikes next year, a reduction from three projected hikes the Fed made in September. This is somewhat in between; it wasnt a totally dovish hike, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. The fact that they retained the language around gradual I think confirms the current monetary policy stance, which the market was hoping would turn a little more data dependent.

Benchmark 10-year yields fell to 2.78 percent

after the Fed statement, the lowest since May 30. The yields have fallen from a seven-year high of 3.261 percent on Oct. 9.

Two-year note yields , which are the most

sensitive to interest rate increases, declined to 2.65 percent, from around 2.66 percent before the Fed statement. The yield curve between two-year and 10-year notes flattened to 13 basis points, from 16 basis points. Its a disappointment to investors who were hoping it was going to be more dovish than it turned out to be. A lot of people were thinking they needed to change the language, " said David Jo, chief market strategist at Ameriprise Financial in Boston. Fed Chairman Jerome Powell in late November said that the key interest rate was just below neutral, a level that neither boosts nor brakes the economy, increasing speculation that the U.S. central bank may pause hikes sooner than previously expected.

(Additional reporting by Chuck Mikolajczak in New York; Editing