(Recasts with Powell’s comments, adds quote, updates prices)
* Powell defends rate increases
* Heavy short positioning seen helping bonds rally
By Karen Brettell
NEW YORK, Aug 24 (Reuters) - U.S. Treasury prices gave back earlier losses on Friday after Federal Reserve Chairman Jerome Powell made the case for further rate increases, but did not give any new indications on the U.S. central bank’s pace of rate hikes.
The Fed’s steady interest rate hikes are the best way to protect the U.S. economic recovery and keep job growth as strong as possible and inflation under control, Powell said in a high-profile endorsement of the central bank’s current approach to policy.
Speaking just days after President Donald Trump criticized the U.S. central bank’s rate hikes, Powell used an annual research symposium in Jackson Hole, Wyoming, to “explain today why my colleagues and I believe that this gradual process ... remains appropriate.”
“There was a bit of a cheapening into Powell’s speech, which basically just reversed thereafter. I wouldn’t say there was much surprising or new on the policy front,” said Jonathan Cohn, an interest rate strategist at Credit Suisse in New York.
Record short positioning in Treasuries, with many investors betting that yields are likely to increase further, has also made it difficult for yields to rise without fresh impetus.
“Treasuries have returned to the lower end of their recent (yield) ranges and I think that speaks to the heavy short positioning, suggesting that it’s easier for the market to rally than it is to sell off,” said Cohn.
Benchmark 10-year notes fell 2/32 in price on the day to yield 2.828 percent, after rising to 2.850 percent before Powell’s speech. The notes have held in a range between 2.822 percent and 3.016 percent since the end of May.
The yield curve between two-year and 10-year notes flattened to 20 basis points, the flattest since 2007.
Interest rate futures traders are pricing in a 96-percent chance of a rate hike at the Fed’s September meeting, down from 98 percent before Powell’s comments, and a 62 percent chance of an additional hike in December, down from 68 percent chance earlier on Friday, according to the CME Group’s FedWatch Tool.
Treasuries have been supported this week by safety buying as investors consider the impact of legal woes for two former Trump advisers.
Trump’s former lawyer Michael Cohen pleaded guilty to eight criminal charges, including campaign finance violations, on Tuesday while former campaign manager Paul Manafort was convicted on charges of tax and bank fraud.
Editing by Nick Zieminski and Susan Thomas