By Ann Saphir and Lindsay (NYSE:) Dunsmuir

(Reuters) -Federal Reserve officials, heartened by recent data, are looking for further confirmation that inflation is cooling and for any warning signs from a still-strong labor market as they steer cautiously toward what most expect to be an interest rate cut or two by the end of this year.

Outlining a litany of reasons for optimism that inflation is back on track to the U.S. central bank's 2% goal after stalling earlier this year, Fed Governor Adriana Kugler said on Tuesday she believes monetary policy is "sufficiently restrictive" to ease price pressures without causing a significant deterioration in the job market.

"If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year," she told the Peterson Institute for International Economics in Washington. The latest data, including a government report showing consumer prices did not rise at all from April to May, is "encouraging," she said.

While more progress is required, Kugler said, "I believe economic conditions are moving in the right direction."

The Fed last week kept its benchmark interest rate in the 5.25%-5.50% range and released updated economic projections that showed its officials had pared back their expectations for rate cuts this year, to one from the three seen in March, after stronger-than-expected inflation data in the first months of 2024.

Most analysts equate fewer rate cuts with a later start to them, particularly after Fed Chair Jerome Powell said the first reduction in borrowing costs will be "consequential" because it could reset market expectations.

Chicago Fed President Austan Goolsbee called the latest inflation data "excellent, after a few months of less-excellent numbers, so hopefully we'll see more like that."

Last year a surge in the supply of both workers and goods allowed inflation to drop quickly without pushing up on unemployment, a "magic" combination that may still have room to run this year, Goolsbee said.

Other Fed officials sounded a little more skeptical.

"We're in a good position, we're in a flexible position to watch the data and to be patient," Dallas Fed President Lorie Logan said at an event in Austin, Texas. While recent data showing inflation is cooling is "welcome news," there must be "several more months of that data to really have confidence in our outlook that we're heading to 2%."

St. Louis Fed President Alberto Musalem, in his first speech on monetary policy since taking up the reins at the regional Fed bank, signaled a potentially longer runway ahead.

"I will need to observe a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate. These conditions could take months, and more likely quarters to play out," Musalem told the CFA Society St. Louis.

TOO SOON TO KNOW

All Fed officials speaking Tuesday stressed the Fed's commitment to making decisions based on incoming economic data.

"I expect interest rates to come down gradually over the next couple of years, reflecting the fact that inflation is coming back to our 2% target and the economy is moving in a very strong sustainable path," New York Fed President John Williams said in an interview on the Fox Business television channel.

He, like most Fed officials of late, declined to give any clear steer about when that could occur. Financial markets are currently pricing in a first rate cut in September, with a second one seen likely in December.

"I'm not going to make a prediction" about the exact path of policy. What happens "depends on how the data evolves," he said. "I think that things are moving in the right direction" for an eventual easing.

Boston Fed President Susan Collins cautioned against over-reacting to "promising" economic news.

"It is too soon to determine whether inflation is durably on a path back to the 2% target," Collins told a group in Lawrence, Massachusetts. "The appropriate approach to monetary policy continues to require patience, providing time for a methodical and holistic assessment of the evolving constellation of available data."

To Richmond Fed President Thomas Barkin, the key will be for price pressures to ease persistently in services as well as in goods.

"We are clearly on the back side of inflation," Barkin told MNI in a webcast interview, adding that he found recent data showing consumer prices did not rise at all from April to May "encouraging." Still, he said, the choppiness in data since last year means the policy path ahead is not clear.

"We will learn a lot more over the next several months and I think we are well positioned from a policy standpoint to react," he said.

Economic crosscurrents that could push the Fed either to wait longer or move earlier were on display on Tuesday, with the U.S. Commerce Department reporting a smaller-than-expected increase in retail sales in May and the central bank reporting a jump in manufacturing output.

For the Fed, "job number 1 is to make sure that we get inflation back to 2%," Williams said.