July 5 (Reuters) - Inflation is easing and the job market has returned to the "tight but not overheated" situation seen before the COVID-19 pandemic threw the U.S. economy into disarray, the Federal Reserve said on Friday in a congressional report that documented the steady emergence of more normal conditions in the aftermath of the health crisis.
"Inflation eased notably last year and has shown modest further progress so far this year," the Fed said in its latest Monetary Policy Report to Congress, noting that in the key area of housing services it is likely just a matter of time before the pace of prices increases settles back to where it was before the health crisis.
The job market, meanwhile, "continued to rebalance over the first half of this year," the report noted. "Labor demand has eased, as job openings have declined in many sectors of the economy, and labor supply has continued to increase, supported by a strong pace of immigration."
"The balance between labor demand and supply appears similar to that in the period immediately before the pandemic, when the labor market was relatively tight but not overheated. Nominal wage growth continued to slow," the report said.
The twice-yearly report to Congress comes ahead of two days of testimony by Fed Chair Jerome Powell, set for Tuesday and Wednesday next week, that is likely to focus on the Fed's plans for monetary policy heading into a sensitive election season.
Job growth has been slowing, and the unemployment rate has risen steadily from 3.5% last July to 4.1% as of June. Inflation remains around 2.6% by the Fed's preferred Personal Consumption Expenditures Price index, still regarded as "elevated" by policymakers but edging towards a point where that may no longer be the case.
New inflation data will be released on Thursday, and if price pressures continue easing it may prompt Fed officials to at least open the door to interest rate cuts as soon as September - a call Powell and his colleagues say will be based solely on the economics of the situation, not how it affects the political prospects of either party.
Yet both Democrats and Republicans are likely to quiz Powell on just that issue.
The Fed at its most recent policy meeting in June left interest rates unchanged at 5.25%-to-5.50%, and fresh projections from policymakers showed them dialing back expectations for rate cuts this year from three to just one. Financial markets and some policymakers, however, still expect the Fed to deliver two cuts of a quarter-point each by year end.
A number of congressional Democrats have already been hounding Powell over high rates, complaining they are exacerbating already-poor housing affordability for low- and middle-income households. Republicans, meanwhile, have been critical about the Fed's initially slow response to inflation and could chastise Powell over any indication he may lower rates ahead of the November election.
(Reporting by Howard Schneider, Ann Saphier and Michael Derby; Editing by Andrea Ricci)