by Howard Schneider

(Reuters) – Inflation is slowing and labor markets have returned to the “stressed but not overheated” conditions they were in before the COVID-19 pandemic, the Federal Reserve said in a report to Congress on Friday.

“Inflation slowed markedly last year and made modest progress toward its goal this year,” the Fed said in its latest Report to Congress on Monetary Policy, saying it was only a matter of time before housing price dynamics, one of the most persistent drivers of inflation, returned to their pre-pandemic pace.

Labor markets “continued to rebalance in the first half of this year. Demand for labor slowed, with job openings declining in many sectors, while job opportunities continued to grow, driven by the strong pace of immigration,” the report summarizes.

“The balance between labor supply and demand appears comparable to that of the period immediately preceding the pandemic, when the labor market was tight but not overheating. Nominal wage growth has continued to slow,” the report said.

The release of the biannual report comes just days before Fed Chairman Jerome Powell is scheduled to testify before Congress and the Senate on Tuesday and Wednesday. Questions from lawmakers are expected to focus on the path of the central bank’s monetary policy, as the presidential election campaign heats up.

Monetary policymakers have reiterated that their decisions will depend on the flow of data, not the policy calendar, and persistent inflation has so far encouraged the Fed to hold off on a first rate cut.

Several Democratic lawmakers have attacked Powell, however, saying high rates are exacerbating the hardships of poor and middle-class households. Republicans, on the other hand, have criticized the central bank’s slow response to the initial surge in inflation and may argue against a rate cut before the November election.

(Reporting by Howard Schneider, Ann Saphier and Michael Derby; by Corentin Chappron; edited by)

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