TREASURIES-Short-dated yields jump as Fed's Powell adopts hawkish tone on inflation

(Recasts with comments from Fed's Powell, adds quotes, Fed speakers, data, updates prices) By Karen Brettell NEW YORK, May 17 (Reuters) - Shorter-dated U.S. Treasury yields jumped on Tuesday and the yield curve flattened after Federal Reserve Chairman Jerome Powell said that the U.S. central bank will "keep pushing" to tighten U.S. monetary policy until it is clear that inflation is declining. "What we need to see is inflation coming down in a clear and convincing way and we're going to keep pushing until we see that," Powell said at a Wall Street Journal event. "If that involves moving past broadly understood levels of 'neutral' we won't hesitate to do that," Powell added, referring to the rate at which economic activity is neither stimulated nor constrained. The comments confirmed the market’s view that the Fed is focused on easing price pressures even as stock market prices wobble and some investors worry that aggressive tightening will tip the U.S. economy into recession. “We’ve always known that 'neutral' is very difficult to estimate, and so the idea that the Fed was going hike a while and then pause and look around was out there, and it was on the table, but he just told us that isn’t going to occur,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. “This is very consistent with what we’ve seen in the past, which is once the Fed starts hiking, they continue to hike until something breaks. Now the question becomes, is what we should be looking at as a potential break the equity market? is it credit? is it housing? I think that’s going to be this cycle’s big unknown,” Lyngen added. Fed funds futures traders expect the U.S. central bank to hike rates by 50 basis points each at its June and July meetings, with the Fed's benchmark rate likely to rise to 2.98% by Feb., from 0.83% now. Two-year yields, which are highly sensitive to interest rate moves, rose to 2.704%, up 14 basis points on the day. Benchmark 10-year notes were last at 2.973%, up nine basis points on the day. The yields hit a 3-1/2-year high of 3.203% on May 9 as investors adjusted for the prospect of even more aggressive Fed policy. But they have dipped in the past week as investors also worry that the rapid monetary tightening may strangle growth and send the economy into a downturn. The yield curve between two-year and 10-year notes flattened four basis points to 27 basis points. Minneapolis Fed President Neel Kashkari said on Tuesday that how high the Federal Reserve will ultimately need to raise U.S. interest rates will depend in large part on how quickly supply bottlenecks can get unstuck. St. Louis Fed president James Bullard also said that the U.S. economy is likely to continue growing at an above-trend pace for at least the next 18 months, and households are likely to continue spending as the influence of the pandemic fades. Yields had gained earlier in the day after data showed that retail sales increased strongly in April, reducing fears that the economy is weakening. Retail sales rose 0.9% last month. Data for March was revised higher to show sales advancing 1.4% instead of 0.5%, as previously reported. The data “showed no sign that the consumer is cracking under the weight of inflation, higher interest rates or the lack of stimulus payments,” Jefferies economists Aneta Markowska and Thomas Simons said in a report. A separate report from the Fed on Tuesday showed production at U.S. factories increased more than expected in April amid continued strong demand for motor vehicles and other goods, which should help to underpin manufacturing activity. U.S. business inventories also increased slightly more than expected in March, lifted by a jump in motor vehicle stocks, government data showed. May 17 Tuesday 3:21PM New York / 1921 GMT Price Current Net Yield % Change (bps) Three-month bills 1.055 1.0725 0.005 Six-month bills 1.52 1.553 0.026 Two-year note 99-157/256 2.7044 0.136 Three-year note 99-152/256 2.8927 0.146 Five-year note 99-16/256 2.9547 0.135 Seven-year note 99-56/256 3.0002 0.118 10-year note 99-40/256 2.9732 0.094 20-year bond 85-172/256 3.3748 0.069 30-year bond 94-104/256 3.1652 0.081 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 27.25 -0.75 spread U.S. 3-year dollar swap 12.00 -0.25 spread U.S. 5-year dollar swap 3.00 -1.00 spread U.S. 10-year dollar swap 6.00 -0.50 spread U.S. 30-year dollar swap -26.00 -0.50 spread (Reporting by Karen Brettell; editing by Jonathan Oatis and Nick Zieminski)