The U.S. jobs data accelerated the decline in the dollar, which has fallen for four consecutive trading days

foreign exchange trading platform——Inflation is easing and the job market has returned to its "tight but not overheated" state before the COVID-19 pandemic sent the US economy into disarray, the Federal Reserve said in a report to Congress on Friday, painting a steady return to normalcy after the health crisis.

"Inflation eased markedly last year and has made modest 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 may only be a matter of time before prices return to pre-epidemic levels.

At the same time, the job market "continued to rebalance in the first half of the year," the report added. "Demand for labour has slowed as job openings in many sectors of the economy have declined, while labour supply has continued to increase, supported by a strong pace of immigration."

"The balance between labour supply and demand appears similar to the situation before the epidemic, when the labour market was relatively tight but not overheated," the report said. "Nominal wage growth continues to slow."

Federal Reserve Chairperson Jerome Powell will testify before Congress on Tuesday and Wednesday. Before that, the Federal Reserve submitted the semi-annual report to Congress.

Job growth has been slowing, with the unemployment rate rising steadily from 3.5 per cent in July to 4.1 per cent in June. Inflation, as measured by the Federal Reserve's favoured personal consumption expenditure (PCE) price index, remains at around 2.6 per cent, a level policymakers still consider "high" but on a gradual downward trajectory towards the target.

The new inflation data will be released next Thursday, and if price pressures continue to ease, it could prompt Federal Reserve policymakers to open the door to a rate cut at least in September - a decision Powell and his colleagues say will be based solely on the state of the economy, rather than on what impact it will have on the political outlook for the two major parties.

However, both Democrats and Republicans are likely to question Powell on this issue.

The Fed left its target range for its benchmark interest rate unchanged at 5.25% to 5.50% at its most recent policy meeting in June. The latest forecasts from policymakers showed they cut their expectations for the number of rate cuts this year from three to just one. However, financial marekt and some policymakers still expect the Fed to cut interest rates twice before the end of the year, each by 25 basis points.

Some congressional Democrats have already attacked Mr. Powell over high interest rates, which they complain are exacerbating already low housing affordability for low- and middle-income households, while Republicans have criticised the Fed for its slow initial response to inflation and could embarrass him at any sign of lowering rates before the November election.

The dollar continued its decline following the release of U.S. employment data

The dollar index fell 0.25 percent to close at 104.88 on Friday, its fourth straight session of losses, after data showed U.S. job growth slowed slightly in June while the unemployment rate rose, strengthening the view that the Federal Reserve could begin cutting interest rates in September.

(One-hour chart of the US dollar index)

Investors have been closely monitoring labour market and inflation data as they try to gauge when the Federal Reserve will start cutting interest rates, which are near 20-high.

"We are seeing a broad retreat in Treasury yields after confirmation of a slowdown in the US labour market. Unexpected increases in unemployment, slower wage growth and downward revisions to headline gains in previous months all point to slowing labour market conditions," said Karl Schamotta, chief market strategist at Corpay in Toronto. "This... raises the likelihood that we will see [Fed] Chairperson Powell discuss a September rate cut at the July policy meeting or the Jackson Hole meeting in August."

The yield on the 10-year U.S. Treasury bond fell 2.36% on Friday to close at 4.268%, its lowest close in more than a week.

The labour market has been at the centre of the Fed's debate over when to start cutting interest rates from near two-decade highs, with the Fed viewing its resilience as a potential catalyst for a possible pick-up in inflation.

"It's not a bad report, but because of the big correction, it shows cracks and weaknesses beneath the surface," said David Wagner, portfolio manager at Aptus Capital Advisors. "That leaves the [Fed] still likely to cut rates at the September meeting."

"The downward revisions in the first two months are consistent with a slowing economy," said Jeffrey Roach, chief economist at LPL Financial. "We should expect the Fed to say more about labour market conditions and the importance of keeping policy appropriate for its dual mandate."