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TREASURIES-Yields fall as Fed's Powell says balance sheet reduction on auto pilot

Karen Brettell

pilot@ (Adds balance sheet comments, quote, 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 eight-month lows on Wednesday after the Federal Reserve lowered projections for rate hikes next year and Fed Chair Jerome Powell said that balance sheet reduction is on autopilot. 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." Stocks fell, however, after Powell said that the Fed does not see a reason to change its balance sheet reduction policy, as it is not seen as creating significant problems. This spurred safety buying of U.S. government debt. "Powell's comment that the pace of balance sheet reduction is on a preset course and adjusting the pace of balance sheet reduction is not an option at this time disappointed the market," said Scott Minerd, global chief investment officer at Guggenheim Partners in Los Angeles.

Benchmark 10-year yields fell as low as 2.75

percent, the lowest since April 4. 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 as low as 2.62 percent, the lowest since Aug. 24. The yield curve between two-year and 10-year notes flattened to 13 basis points, from 16 basis points before the Fed statement. 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.

(Editing by Diane Craft)