Federal Reserve policymakers are increasingly likely to leave interest rates unchanged at their next meeting after fresh evidence of easing inflation, but they’ll be careful to strike a tone that their job isn’t done yet.

A report Thursday showed the core consumer price index, which excludes often-volatile food and energy costs, rose 0.2% for a second month. That marked the smallest back-to-back gains in more than two years, adding to a steady wave of disinflation in recent months.

The data “came in largely as expected, and that is good news,” Federal Reserve Bank of San Francisco President Mary Daly said in an interview on Yahoo! Finance. “It is not a data point that says victory is ours. There’s still more work to do. And the Fed is fully committed to resolutely bringing inflation back down to its 2% target.”

Officials have been divided as to how to proceed from here. One faction of the Fed’s policy-setting committee argue that the past year-and-a-half of interest-rate hikes has done its job, while another group contends that pausing too soon could risk inflation reaccelerating.

It’s been a balancing act to appease the two. In June, the Fed held the federal funds rate steady for the first time since it started hiking rates in March 2022, but estimated two more increases this year. The first of those was accomplished last month, and it’s unclear whether there will be a second.

Earlier this week, Fed Governor Michelle Bowman reiterated her view that the US central bank may need to raise rates further in order to fully restore price stability, while Philadelphia Fed President Patrick Harker said that officials may be able to hold steady.

Cooling inflation, along with moderating growth in job gains and wages, has been fueling hopes that the Fed can successfully tame inflation without triggering a big jump in unemployment. Several economists, including those at JPMorgan Chase & Co. and Bank of America Corp., have scrapped their recession calls in recent weeks.

But Chair Jerome Powell, when he speaks at the Fed’s September meeting as well as its Jackson Hole conference later this month, won’t go so far to declare victory yet. While he’s said the central bank is slowing its pace of hikes as it nears the peak, he isn’t ruling out the possibility of increases at consecutive meetings.

“The Fed does not need to hike in September, pleasing the doves who want no more tightening from here on out,” said Derek Tang, economist with LH Meyer/Monetary Policy Analytics. “Even the hawks would be fine with pausing until November or later as long as the door to hikes is not closed all the way.”

Officials have said that monetary policy moves will depend on incoming data, with Bowman saying she’s “looking for evidence that inflation is on a consistent and meaningful downward path.” 

The price-growth slowdown seen in July “is enough to keep the Fed on the sidelines in September but not enough to declare victory,” said Diane Swonk, chief economist at KPMG LLP in Chicago.

Policymakers will also see another CPI and jobs report before their Sept. 19-20 meeting.

The Fed may want to keep open the option to hike later because of a potential re-acceleration in the economy, said Neil Dutta, head of economics at Renaissance Macro Research LLC.

“The economy is growing above trend,” Dutta said on Bloomberg Television. “I don’t think the Fed has done enough. There is a risk that the Fed is patting itself on the back by the end of the year only to watch inflation potentially turn back up.”

--With assistance from Laura Curtis.

This article was provided by Bloomberg News.