* Fed funds futures traders increase December rate cut odds to 73% * Fed officials express mixed views on rate cuts amid inflation concerns * Williams: Rate cuts possible without risking inflation goal (Updated in New York afternoon) By Karen Brettell NEW YORK, Nov 21 (Reuters) - U.S. Treasury yields fell to a three-week low on Friday as investors raised bets that the Federal Reserve will cut interest rates next month due to a weakening labor market. Data on Thursday showed the unemployment rate increased in September even as employers added more jobs than economists had expected during the month. The August payrolls data was also revised to show employers shedding jobs for the second time this year. Stock market volatility and dovish comments from New York Fed President John Williams added to the move on Friday. “The market is getting a little softer in terms of risk sentiment and there's been a little bit more in terms of uncertainty in the ultimate path of Fed policy,” said Zachary Griffiths, head of investment-grade and macro strategy at CreditSights in Charlotte. For the jobs data, “the uptick in the unemployment rate and the revised down to negative job gains in August may have been the bigger market driver relative to the pretty notable upside surprise on the actual September print itself,” Griffiths said. The federal government is catching up on data after reopening last week from a record 43-day shutdown. Fed funds futures traders are now pricing in 70% odds of a December cut, up from 39% on Thursday, according to the CME Group's FedWatch Tool. The 2-year note yield, which typically moves in step with Fed rate expectations, was last down 3.8 basis points at 3.52%. The yield on benchmark U.S. 10-year notes fell 3.7 basis points to 4.067%. The yield curve between two-year and 10-year notes was at 55.5 basis points. New York Fed's Williams said on Friday that the U.S. central bank can still cut interest rates "in the near term" without putting its inflation goal at risk. Traders had reduced bets on a December rate cut after several Fed officials in the past two weeks indicated they were reticent to continue easing with inflation above the bank's 2% annual target. “Our take after reading those was that on balance, there is still more labor market concern relative to inflation concern, but it's clearly a close call,” Griffiths said, adding that he expects the Fed to cut rates next month. Boston Fed President Susan Collins said on Friday that monetary policy is in the right place amid a resilient economy. Dallas Fed's Lorie Logan on Friday called for leaving the policy rate on hold "for a time" while the central bank assesses how much of a brake the current level of borrowing costs is putting on the economy. Global brokerages are split over whether the Fed will cut interest rates in December or hold them. Data on Friday showed that U.S. factory activity slowed to a four-month low in November as higher prices because of tariffs on imports restrained demand, leading to a piling up of unsold goods that could hinder growth in the overall economy. The U.S. Bureau of Labor Statistics said on Friday it had canceled the release of October's consumer price report because the government shutdown had prevented the collection of data. November's Consumer Price Index report will be published on December 18. (Reporting by Karen Brettell. Editing by Mark Potter and Nick Zieminski) ((karen.brettell@tr.com)) Keywords: USA BONDS/ (UPDATE 1)
