(Recasts; adds Fed details, analyst quotes; updates yields)
By Kate Duguid
NEW YORK, March 20 (Reuters) - U.S. Treasuries rallied on Wednesday, taking the benchmark 10-year yield to a 14-month low, after the Federal Reserve said it would hold interest rates steady and its policymakers abandoned projections for further rate hikes this year while flagging an expected economic slowdown.
In a major shift in its perspective, the U.S. central bank also expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.
The two-year Treasury yield, which is a proxy for investor sentiment about interest-rate hikes, logged its largest daily drop since Jan. 3 and last at 2.396 percent. The benchmark 10-year yield, which reflects investor sentiment about the overall health of the economy, fell by more than 8 basis points to the lowest since January 2018 and was last at 2.532 percent.
Yields on shorter-dated Treasury notes retraced some of their initial declines as Fed Chair Jerome Powell spoke at a press conference following the conclusion of its two-day meeting.
The Fed also said it would slow the monthly reduction of its Treasury bond holdings from up to $30 billion to up to $15 billion beginning in May. It said it would end its balance sheet runoff in September provided the economy and money market conditions evolved as expected.
"(The statement) definitely skewed on the dovish side of expectations. The main surprise is that the Fed projects zero hikes in 2019. Whereas our broad expectation, and the expectation of consensus, was for them to leave in at least one hike in 2019," said Evan Brown, head of macro asset allocation strategy at UBS Asset Management.
"There's one hike projected for 2020 but there's a long time between now and then and so the market is effectively taking the view that the Fed is done tightening." In January, the Fed pivoted after hiking rates four times in 2018, pledging patience before making further moves. In February, Fed Chair Jerome Powell also said the central bank would stop shrinking its balance sheet later this year. (Reporting by Kate Duguid; Editing by Richard Chang)