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* U.S. 2-year yield hits highest since Feb. 2020 * U.S. 5-year yield rises to highest since December 2019 * U.S. yield curve flattens * Fed funds futures price in nearly five hikes for 2022 * Fed funds price in 20% chance of 50-bps Fed hike in March (Updates prices, adds new comment) By Gertrude Chavez-Dreyfuss NEW YORK, Jan 27 (Reuters) - U.S. yields on the shorter end of the curve soared on Thursday after Federal Reserve Chair Jerome Powell flagged multiple interest rate increases this year, citing the economy's strong labor market and persistently high inflation. The surge in short-term yields and a corresponding decline in long-term rates flattened the yield curve, as traders braced for imminent rate hikes. The 2-year and 10-year yield curve flattened to 61.0 basis points on Thursday, the narrowest spread since November 2020. The U.S. 2-year yield, which reflects interest rate expectations, surged to 1.208%, a nearly two-year peak. The U.S. 5-year yield, which is also an indicator of the market's rate outlook, climbed to 1.701% overnight, the highest since December 2019. But the rise in 5-year yields has been contained in the U.S. session. Traders in the fed funds futures market moved to price in nearly five rate hikes this year in the wake of Powell's remarks on Wednesday, starting with the March meeting. Futures have factored in about 30 basis points of tightening. A 50-basis point hike showed a 20% probability in rate futures. Prior to Wednesday's Fed policy decision, rate futures indicated about four rate increases for 2022. Powell on Wednesday said there is "quite a bit of room to raise interest rates without threatening the labor market that is by so many measures historically tight." "The Fed could hike four to five times this year, and that's not horrendous because it is expected. What they decide to do this year is not all that important, except as to how it sets up for next year," said Jim Vogel, senior rates strategist, at FHN Financial in Memphis, Tennessee. "If the rate hikes this year are not enough and the Fed has to keep raising rates again in 2023 because everything they have seen in inflation from just six weeks ago makes them more nervous, that's a problem," he added. In afternoon trading, U.S. 2-year yields were last up nearly 10 basis points at 1.1882%, while 5-year yields were up 1.5 basis points at 1.6599%. A solid $53 billion U.S. 7-year note auction also added to bids on the longer end of the curve. The high yield was 1.769%, lower than the expected level at the bid deadline, suggesting strong demand. The bid-to-cover ratio, another measure of appetite for the debt, was 2.36, higher than the 2.28 average. Post-auction, U.S. 7-year note yields slipped roughly 3 basis points to 1.7735. The benchmark 10-year yield slid 4 basis points to 1.8012%, while 30-year yields dropped 8 basis points to 2.0907%. Another yield curve measure, the spread between 5-year and 30-year yields, also flattened to 42 basis points , the tightest gap in two weeks. "The market isn't willing to fade the Fed's renewed hawkishness, but there is growing apprehension of how it impacts risk assets and the real economy," said BMO Capital in a research note. January 27 Thursday 4:52PM New York / 2152 GMT Price Current Net Yield % Change (bps) Three-month bills 0.205 0.208 0.008 Six-month bills 0.4325 0.4395 0.049 Two-year note 99-97/256 1.1902 0.099 Three-year note 99-38/256 1.4194 0.078 Five-year note 99-60/256 1.6599 0.015 Seven-year note 97-108/256 1.7723 -0.028 10-year note 96-48/256 1.8012 -0.045 20-year bond 97-100/256 2.1627 -0.068 30-year bond 95-56/256 2.0914 -0.075 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 13.75 0.25 spread U.S. 3-year dollar swap 13.25 -0.75 spread U.S. 5-year dollar swap 6.00 -0.75 spread U.S. 10-year dollar swap 6.00 0.00 spread U.S. 30-year dollar swap -17.00 1.25 spread (Reporting by Gertrude Chavez; Editing by Catherine Evans, Nick Zieminski and Jonathan Oatis)