Most Federal Reserve watchers don’t expect the central bank to ease monetary policy this week in Washington, D.C., but they do expect policymakers to set the stage for an interest rate cut at their next meeting in September.

Fed officials have said they are getting closer to having confidence inflation is sustainably dropping to their 2% goal. They have also said they are paying more attention to rising unemployment, another sign that cuts may be nearing.

But most Fed watchers say the central bank still needs just a bit more time to be sure, while also preparing the markets for the significant action to come.

"The pressure is growing for them," said former Kansas City Fed president Esther George. "I think that they are going to look at September very seriously. It’s looking to me like we are coming to a time where that decision is more important and it's why I'm more confident."

The latest reassurance that a cut could be nearing came Friday when a new reading of the Fed’s preferred inflation gauge — the core Personal Consumption Expenditures (PCE) index — showed its lowest annual gain in more than three years.

The 2.6% annual increase in the month of June was the same level as May and down from 2.8% in April. On a three-month annualized rate, core PCE dropped back to 2.3% from 2.9%.

Another inflation measure, the Consumer Price Index (CPI), has also shown progress.

On a "core" basis — which excludes volatile food and energy prices the Fed can’t control — CPI rose 3.3% year over year in the month of June. That was down from 3.4% in May and 3.6% in April.

Thus at the conclusion of this week's policy meeting on Wednesday, "the Fed will say to the effect that the recent economic data, especially the inflation data, has given them the confidence that inflation is likely returning to their target and that reducing rates would be appropriate soon," said Wilmington Trust chief economist Luke Tilley.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

'Why wait?'

Some Fed watchers do argue the Fed has the basis to support a cut at its meeting this week, even as they note they don’t expect it to happen.

"I don't see a reason within the economic data that they should not cut this meeting," Tilley said. "In fact, I think it's hard to see a reason that they should keep rates where they are."

That said, there’s "no way" the Fed would do that, Tilley added, because it runs the risk of "spooking the markets." He predicts one cut in September and another in December, followed by a total of six quarter-point cuts in 2025.

A cut this week would, in fact, come as a near-total surprise to markets. Traders currently are estimating just a 5% chance of a cut this week, compared with a near-total chance of a cut at the Sept. 17-18 meeting.

But Goldman Sachs chief economist Jan Hatzius is another observer who also sees a solid rationale for cutting in July.

"If the case for a cut is clear, why wait another seven weeks before delivering it?" Hatzius said in a research note.

"Second, monthly inflation is volatile, and there is always a risk of a temporary re-acceleration, which could make a September cut awkward to explain. Starting in July would sidestep that risk."

Another reason why September is more likely is that Fed officials have indicated they need more than one quarter’s worth of good data to know for sure that inflation is traveling in the right direction. They may want to see what the July and August readings show first.

"I do think they're going to strain hard to say September is probably the time, but they're going to have to be careful with their language so they don't commit without seeing the August data," George said.

A tight rope

Another factor that could influence when the Fed cuts is a cooling in the labor market. The unemployment rate has ticked up for two consecutive months to 4.1% — above where some Fed officials predicted the rate would be at the end of this year.

This is important because the Fed has a dual mandate to maximize employment in the US while maintaining stable prices. Fed Chair Jerome Powell had made it clear the central bank is focusing more on the labor side of that mandate as inflation comes down.

Chicago Fed president Austan Goolsbee told Yahoo Finance earlier this month that the cooling of the job market is an "area of concern" and "one to keep your eye on."

While there are some other warning lights, he added, so far this isn’t looking like the beginning of a recession. Rather, it looks more like a labor market coming back into better balance following the shocks of the pandemic.

Tilley doesn’t expect the job market to get much worse from here. He is projecting the unemployment rate rises to 4.5% by the end of the year from 4.1% currently, as more people enter the job market for the first time, those who had been out of the job market re-enter, and others lose jobs.

But George isn’t convinced a soft landing is a sure bet and thinks the recession is coming at some point. The momentum of people joining the job market is starting to sag, she said, and that indicates a slowdown.

In an election year, "if you let unemployment spin up for a reason that doesn't seem well connected to the inflation story, I think that would be a hard message to the public," she added. "This is a tightrope for them."

There is a concern that the Fed could in fact keep monetary policy too tight for too long, thus causing a recession.

"The Fed has a history of keeping rates too tight for too long, causing a recession perhaps and then keeping them too low after the recession has bottomed out," Tilley said.

Read more: A look at the federal funds rate over the past 50 years: How has it changed?

But as long as the Fed telegraphs a rate cut for September, what happens this week shouldn’t present any risk to the economy because the Fed's signal will cause government bond yields and borrowing rates to move lower.

Looming in the background of these discussions is that a September rate cut could cause the central bank to face political criticism from both sides of the aisle in Washington.

Lawmakers from both parties signaled during Powell's congressional testimony they would criticize the central bank if this key September decision didn't go their way.

If Powell and his colleagues choose to keep rates at a 23-year high, a growing chorus of Democratic critics calling for cuts may reach a crescendo.

But if policymakers do indeed cut, Republicans from Donald Trump on down will be sure to cast the move as caving to election-year pressure.

In an interview with Bloomberg published earlier this month, the Republican nominee again reiterated that central bank officials should not ease monetary policy before the November election.

"It’s something that they know they shouldn’t be doing," Trump said.

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