Since Federal Reserve officials last met in July, the economy has moved in the direction they hoped to see: Inflation continues to ease, if more slowly than most Americans would like, while growth remains solid and the job market cools.

When they meet again this week, the policymakers are likely to decide they can afford to wait and see if the progress continues. As a result, they’re almost sure to leave their key interest rate unchanged when their meeting ends Wednesday.

The cooling of inflation suggests that the Fed is edging toward a peak in the series of rate hikes it unleashed in March of last year — the fastest such pace in four decades, one that has made borrowing much costlier for consumers and businesses.

The focus for Wall Street investors and analysts now is shifting toward what comes next. Some clues could come in the updated interest rate projections it releases each quarter and at a news conference with Chair Jerome Powell.

Another rate hike this year will likely remain on the table, and Fed officials may project fewer cuts in their key rate next year than they did in June. This would underscore the Fed’s determination to keep rates elevated well into next year as it strives to get inflation down to its 2% target.

Inflation pressures showed signs of persistence in two government reports last week, adding some uncertainty to the outlook. Claudia Sahm, a former Fed economist, said she thinks a “soft landing,” in which the Fed manages to curb inflation without causing a recession, remains possible. But she cautioned that inflation might stay higher for longer than the central bank expects. Or, she suggested, the cumulative effects of the Fed’s 11 rate hikes could ultimately tip the economy into recession.

“We are at a point where things could plausibly go in a lot of different directions,” Sahm said. “They’re going to react as it unfolds.”

Still, most economic data in the past two months has pointed in a positive direction. Inflation in June and July, excluding volatile food and energy prices, posted its two lowest monthly readings in nearly two years.

And signs have grown that the job market isn’t as robust as it had been, which helps keep a check on inflation: The pace of hiring has moderated. The number of unfilled openings fell sharply in June and July. And the number of Americans who have started seeking work has jumped. This has brought labor demand and supply into better balance and eased the pressure on employers to raise pay to attract and keep workers, which can lead them to raise prices to offset higher labor costs.

“That was a hell of a good week of data we got last week,” Christopher Waller, a member of the Fed’s Board of Governors who is close to Powell, said in an interview on CNBC this month. “It’s going to allow us to proceed carefully. There is nothing saying that we need to do anything imminent anytime soon.”

Powell’s own speech late last month at the Fed’s annual conference of central bankers in Jackson Hole, Wyoming, stressed his belief that the Fed can act in a measured fashion.

“We will proceed carefully,” he said, “as we decide whether to tighten further or instead to hold the policy rate constant and await further data.”

Last week’s inflation data underscored, though, that even a soft landing may not be a smooth one. On a monthly basis, consumer prices jumped 0.6%, the most in more than a year and 3.7% from a year earlier, the second straight such increase.

The updated projections the Fed will issue Wednesday will include estimates of where its policymakers think their key rate is headed. In June, they projected two more hikes, and in July they imposed one of them, raising their benchmark rate to roughly 5.4%, its highest level in 22 years.

Last week’s inflation readings might lead the Fed to forecast one additional rate hike this year. And some economists say the policymakers may forecast just one or two rate cuts in 2024, fewer than the three they envisioned in June, in part to dispel any overly optimistic expectations on Wall Street for deeper rate reductions.

“They’re going to want to hedge that risk,” said Jose Torres, chief economist at Interactive Brokers. “Market participants are just a little too optimistic about inflation.”

Even some moderate members of the Fed’s interest-rate committee have said recently that they may have more work to do to conquer inflation.

“I expect we’ll need to hold rates at restrictive levels for some time,” said Susan Collins, president of the Federal Reserve Bank of Boston. “And while we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”

But even more hawkish officials — those who typically prefer higher rates to fight inflation — are acknowledging that the Fed risks acting too aggressively and causing a recession. That represents a shift from even a few months ago, when the Fed’s hawks worried more about doing too little to fight inflation.

Lorie Logan, president of the Dallas Fed, said that “we must proceed gradually, weighing the risk that inflation will be too high against the risk of dampening the economy too much.”

This week’s Fed meeting comes as central banks around the world are mostly raising rates to fight inflation, which spiked after the pandemic hampered global supply chains, causing shortages and higher prices. Inflation worsened after Russia’s invasion of Ukraine in February 2022 sent oil and other commodity prices spiking.

The European Central Bank raised its benchmark rate last week for the 10th time to 4%, the highest level on record since the euro was established in 1999, though it signaled that it could be its last hike. The Bank of England is also expected to increase its rate when it meets Thursday. The Bank of Japan, which meets Friday, is under less pressure to boost rates, although it has taken steps to allow Japanese long-term rates to tick up.

Rising rates overseas have led to higher yields on U.S. Treasurys, which are needed to attract investors.

“Globally, monetary policy is on a tightening track, and that puts some upward pressure on rates in the U.S.,” said William English, a former senior Fed official who is now a professor at Yale School of Management.

(AP)