TREASURIES-Yields drop as Fed's Powell says it's too early to talk about tapering

(Adds context to Powell's comments, updates prices) By Karen Brettell NEW YORK, April 28 (Reuters) - U.S. Treasury yields fell on Wednesday after Federal Reserve Chairman Jerome Powell said now is not the time to discuss tapering bond purchases as the economy is still far from meeting the U.S. central bank's employment and inflation goals. Analysts see the Fed as likely to begin hinting toward a taper announcement in the coming months in order to prepare the market for a reduction in bond purchases that could begin later this year. But Powell "made it pretty clear that they are a fairly long way away from tapering," said Tom di Galoma, a managing director at Seaport Global Holdings in New York. "I think the Fed is still quite unsure of how the economy is going to be six months from here." Benchmark 10-year yields dropped to 1.609%, from a two-week high of 1.661%, after Powell's comments at the end of the Fed's two-day meeting. Economic data is showing strong growth as businesses reopen from COVID-related shutdowns, but it is not clear that the improvement will continue for more than a few months. Gross Domestic Product data on Thursday is expected to show strong growth in the first quarter, while next week's employment data for April should also show an improving labor market. The Fed also faces a challenge in reducing support for bonds as supply is likely to continue to increase. U.S. President Joe Biden is launching new spending programs and it will take time to raise any new taxes designed to pay for them. "With all the money that is being spent ... it puts the Fed in a very difficult position to taper," di Galoma said. Biden will address Congress later on Wednesday on his plans to spend $1.5 trillion on childcare and college education and raise taxes on wealthy Americans to pay for it. That is on top of a $2 trillion jobs-and-infrastructure plan to be paid for by raising taxes on U.S. companies. The Fed also acknowledged increasing inflation in its meeting statement, but characterized the price pressures as transitory, as it held interest rates and its monthly bond-buying program steady. Some market participants are asking whether inflation increases could be more permanent. "It's just hard to know what transitory is," said Patrick Leary, chief market strategist and senior trader at Incapital in Minneapolis. "I think the market is going to get impatient about the level of inflation and how long it might last, and it might be perceived by the market that that inflation is not transitory, causing a little bit of a revolt, so to speak, in the bond market," Leary added. Inflation expectations hit eight-year highs on Wednesday with breakeven rates on 10-year Treasury Inflation-Protected Securities pricing in average annual inflation of 2.43% for the next decade. Overnight repo rates fell to zero after the Fed left the interest it pays on excess reserves (IOER) unchanged. The repo rate has intermittently traded in negative territory in the past few months as short-dated supply falls. The Fed is seen as likely to hike IOER if the federal funds rate falls below five basis points, from its current seven basis points. April 28 Wednesday 4:18PM New York / 2018 GMT Price Current Net Yield % Change (bps) Three-month bills 0.02 0.0203 0.005 Six-month bills 0.035 0.0355 0.001 Two-year note 99-235/256 0.1661 -0.014 Three-year note 100-30/256 0.3352 -0.021 Five-year note 99-126/256 0.854 -0.024 Seven-year note 99-168/256 1.3015 -0.020 10-year note 95-160/256 1.6094 -0.013 20-year bond 95-52/256 2.1744 -0.006 30-year bond 91-28/256 2.2881 -0.005 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 11.25 0.50 spread U.S. 3-year dollar swap 13.75 0.50 spread U.S. 5-year dollar swap 8.75 1.50 spread U.S. 10-year dollar swap -0.25 0.75 spread U.S. 30-year dollar swap -26.75 0.75 spread (Reporting by Karen Brettell; Editing by Will Dunham and Sonya Hepinstall)