By Karen Brettell

NEW YORK, May 13 (Reuters) - Longer-dated yields reached the highest levels since July on Wednesday after producer prices rose more than economists had expected in April, before easing as traders evaluated the likely impact on Fed policy.

U.S. producer prices posted their biggest gain since early 2022, following Tuesday's consumer price data that showed annual inflation rose at its fastest pace in three years.

Traders are focused on the risk inflation will continue to rise as a result of prolonged energy disruptions in the Middle East. More than a month after a tenuous ceasefire took effect, the U.S. and Iran remain far apart on the terms needed to end the war.

Ryan Swift, chief U.S. bond strategist at BCA Research, says the data so far is unlikely to shift Fed policy towards rate hikes.

Swift framed the inflation outlook around three sequential stages. The first - direct effects of energy prices on headline CPI and PPI - is already playing out. This has yet to translate into indirect pass-throughs, where business costs are passed on to consumers and seen in core inflation, though other data suggests that "it's only a matter of time" before this shows up more broadly.

SECOND-ROUND EFFECTS WOULD BE CRITICAL FOR THE FED

For the Fed, however, the critical trigger would be second-round effects. "If we start to see higher wage growth and rising inflation expectations, then you would definitely need to hike rates,” Swift said. For now, neither condition is met - earnings are "coming down pretty quickly" and inflation expectations remain "fairly well contained."

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, fell 1.1 basis points to 3.985%.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 0.4 basis points to 4.467%. It earlier reached 4.49%, the highest since July 17.

Separately, traders are monitoring a summit in Beijing on Wednesday between President Donald Trump and China's President Xi Jinping.

Trump and an entourage that included Nvidia's Jensen Huang and Elon Musk were greeted with a lavish welcome in Beijing on Wednesday as he prepared to ask China's Xi Jinping to "open up" to U.S. business at the start of their two-day summit.

Kevin Warsh, meanwhile, is set to be confirmed as Fed Chair on Wednesday, a day after the Senate voted to approve his 14-year term as governor.

Traders will focus on whether Warsh adopts a less dovish tone on future interest rate cuts as a result of the latest inflation increases.

The Treasury will sell $25 billion in 30-year bonds on Wednesday, the final sale of $125 billion in coupon-bearing supply this week.

The U.S. government's $58 billion auction of three-year notes on Monday was met with limited demand and a $42 billion auction of 10-year notes on Tuesday inspired only average interest.