* Fed purchased $1.575 billion in Treasury coupons
* Market awaits Fed policy decision due Wednesday
* Treasury to sell $32 bln 2-yr notes at 1 p.m. (1800 GMT)
* November consumer price data shows subdued inflation
By Ellen Freilich
NEW YORK, Dec 17 (Reuters) - U.S. Treasuries prices rose on Tuesday ahead of a two-year Treasury note sale and investors waited for Wednesday's Federal Reserve policy statement.
Traders remained focused on what the Fed will say on Wednesday about its stimulus program when it concludes a two-day policy meeting.
The government's report that U.S. consumer prices were flat in November and that the Consumer Price Index, excluding its more volatile food and energy items, rose just 0.2 percent, indicated the U.S. central bank could be flexible in determining when it might reduce the large-scale purchases of Treasuries and mortgage-backed securities it has been making to try to stimulate lending and economic activity.
As part of that ongoing purchase program, the Fed bought $1.575 billion in Treasury coupons on Tuesday.
Many analysts expect a tapering announcement from the Fed in the first quarter of next year. But they add a move this week to trim bond buying is not out of the question.
"I put the probability of a tapering in December at 20 percent, January at 40 percent and March at 80 percent," said Thomas di Galoma, co-head of fixed-income rates at ED&F Man Capital in New York.
Recent data showing lower unemployment and improved economic indicators support an argument for the Fed to begin trimming its bond purchases, though a third element - lower inflation than the Fed wants - could prove to be a stumbling block. Fed policymakers worry that meager price increases risk deflation, a phenomenon that tends to slow economic activity.
But after analyzing the November consumer price index, Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said, "Net, net inflation is not dead and there is no deflation.
"(The Fed) delayed tapering QE in September due to Washington uncertainty, and now, with Washington hours away from agreeing to fund the federal government for two more years, there is virtually no reason not to taper. We vote yes. Taper. Do it."
On the open market, benchmark 10-year Treasury notes were up 6/32, their yields at 2.86 percent, toward the high end of their recent range.
The 30-year bond price was unchanged, leaving its yield at 3.90 percent.
A Reuters poll last week showed 32 economists forecast the U.S. central bank would act in March, while 22 said it would scale back its $85 billion monthly bond-buying program in January. Twelve economists expected a tapering announcement this week.
Short-dated issues stabilized after their yields broke above key support levels on Thursday, suggesting anxiety about how long the Fed will keep policy rates near zero after it stops buying bonds, currently at a monthly pace of $85 billion.
Dealers face a continued wave of supply this week, starting with a $32 billion two-year note auction at 1 p.m. (1800 GMT).
"Uncertainty regarding the FOMC outcome tomorrow afternoon could potentially keep some bidders sidelined, but with inflation still remarkably quiescent, there is no reason to expect the Fed to begin to raise rates in the foreseeable future, even if they do begin to taper asset purchases," said John Canavan, fixed-income analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
"That should argue for a steady state auction today, meaning good, but not overwhelming demand, and a stop-out rate on or just through the 1:00 p.m. bid side," he said.
The Treasury will sell $35 billion in five-year debt ; $29 billion in seven-year notes ; and $16 billion in five-year Treasury Inflation-Protected Securities.
All of this week's auctions settle on Dec. 31.