By Mark DeCambre, MarketWatch , Sunny Oh

Fed gathering is slated to commence later Tuesday

U.S. Treasury yields ticked slightly lower on Tuesday ahead of an important policy-setting gathering of the Federal Reserve that is expected to kick off later in the morning, which could determine the outlook for government paper for the rest of 2018.

The benchmark 10-year Treasury yield was at 2.219%, compared with 2.230%, while the 30-year bond yield slipped to 2.792%, versus 2.804% late Monday in New York.

However, the 2-year note yield , the most sensitive to Fed moves, was at 1.381%, little changed compared with 1.384% in the previous session.

Bond prices and yields move inversely.

The policy-setting Federal Open Market Committee is widely expected to announce the beginning an unwind of its $4.5 trillion portfolio of government securities when it releases its policy update.

In a Goldman Sachs note dated Sept. 15 led by David Kostin, chief U.S. strategist, the bank said it expected the Fed to say its balance sheet-normalization would begin in October.

Although rates are forecast to stay on hold, the asset-portfolio reduction and any signal from the central bank about recalcitrant levels of inflation will be closely watched, with the move likely rippling through other assets as yields tick higher.

Check out: Fed's balance-sheet unwind will be moment of truth for financial markets (http://www.marketwatch.com/story/feds-balance-sheet-unwind-will-be-moment-of-truth-for-financial-markets-2017-09-18)

See:Why the bond market isn't freaking out from the Fed's shift to quantitative tightening (http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14)

The effect of the central bank's unprecedented asset unwind isn't known. But some strategists are offering projections.

"We expect the announcement next week of Fed balance sheet normalization, to begin in October, will lift 10-year Treasury yields via the term premium and put modest downward pressure on equity valuations. Bank stocks, which no longer carry their postelection policy premium, are poised to profit from higher yields and a steeper curve," Goldman wrote on Friday.

Read:Fed to take historic leap into the unknown (http://www.marketwatch.com/story/fed-to-take-historic-leap-into-the-unknown-2017-09-14)

"Term premium" refers to a differential between bonds with shorter maturities relative to those with longer maturities. Recently the premium between 2-year and 10-year notes has narrowed, which can imply a bearish outlook on the economy.

Goldman is expecting for the 10-year yield to climb in absolute terms but also relative to its short-dated counterpart, steepening the so-called yield curve, which should be beneficial to banks that borrow short-term and extend loans on a longer-term basis. Meanwhile, higher yields might lure some investors away from assets perceived as risky like stocks, to find richer yields, with the Dow Jones Industrial Average and the S&P 500 index on Monday being pushed to all-time highs (http://www.marketwatch.com/story/dow-sp-500-line-up-for-fresh-records-to-start-the-week-2017-09-18).

The reduction of the Fed's balance sheet, accumulated during the heart of the 2007-'09 financial crisis, also is expected to have a tightening effect on rates, pushing them higher along with the central bank's rate-hike efforts. Wall Street is pricing in a nearly 60% chance of a rate increase before the end of 2017, up from around 37% about a month ago, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

So as to mute the impact the Fed is expected to take baby steps in the unwind. The current plan calls for the balance sheet to initially shrink by only $10 billion a month. The pace of the rundown would then increase by $10 billion every quarter, up to a maximum of $50 billion a month.

Ahead of the policy announcement due Wednesday, a report on construction on new houses in August showed a decline of 0.8% to an annual rate of 1.18 million (http://www.marketwatch.com/story/housing-starts-dip-in-august-but-permits-surge-in-sign-of-optimism-2017-09-19), but a jump in new permits of 5.7% suggest the dip would be temporary. The government said the data wasn'tt muddied by Hurricane Harvey, which inundated swaths of the Houston and Louisiana area.

Meanwhile, import prices climbed 0.6% in August (http://www.marketwatch.com/story/cost-of-imported-goods-surge-in-august-led-by-fuel-2017-09-19), but have only showed gains of 2.1% for the next 12 months, suggesting the U.S. isn't importing much inflation despite the weaker dollar. Since the beginning of the year, the U.S. currency has strengthened more than 10% against its peers. The ICE Dollar index, a gauge of the dollar's strength against six major counterparts, depreciated 0.2%.

(END) Dow Jones Newswires

September 19, 2017 09:44 ET (13:44 GMT)

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