By Ann Saphir

(Reuters) -With inflation now only just above the Federal Reserve's 2% target and wage pressures easing, U.S. central bankers are widely expected to cut short-term borrowing costs next week in an effort to keep the labor market from further cooling.

But an uptick in underlying price pressures evident in data released on Thursday, what's likely to be a confusing monthly read on the labor market on Friday, and uncertainty over the outcome of the Nov. 5 U.S. presidential election make the road for further interest rate reductions in December and especially next year less clear.

Inflation by the Fed's targeted measure, the year-over-year increase in the personal consumption expenditures price index, dropped to 2.1% in September, from 2.3% in August, a Commerce Department report on Thursday showed. The Fed aims for 2% inflation.

A separate report from the Labor Department showed the broad wage-growth gauge known as the employment cost index rose 0.8% in the third quarter from the previous quarter, the smallest increase since the second quarter of 2021.

A rise in labor costs was among the factors that had alarmed Fed policymakers in late 2021, prompting the central bank's pivot to tighter policy to head off an upward spiral of rising wages and prices.

The fact that wage growth eased last quarter even as the economy expanded solidly may give Fed policymakers added confidence that inflation won't resurge, and a green light for interest rate cuts in their last two meetings of the year.

"We view the data overall as suggesting that upside inflation risks from a strong economy and labor market remain to date muted, and while the Fed and investors will need to keep this under ongoing review given the strength in the data, it is fundamentally constructive for risk and for the 'soft landing,'" Evercore ISI Vice Chairman Krishna Guha wrote in a note.

A soft landing refers to a scenario in which inflation cools but the labor market remains healthy and the economy avoids recession, a historically rare occurrence but one that so far has played out.

Futures contracts settling to the Fed's policy rate ratified that view, putting the chances of a 25-basis-point cut at the central bank's Nov. 6-7 meeting at about 94%, and giving a second 25-basis-point cut in December about a 70% chance.

The Fed last month lowered its policy rate by half of a percentage point to the 4.75%-5.00% range, in large part because policymakers felt that keeping it high even as inflation was falling could harm employment.