Aug 30 (Reuters) - Federal Reserve policymakers on

Friday got fresh confirmation that inflation is continuing to

ease, clearing the way for a first interest rate reduction next

month as they shift their focus to preventing further cooling in

the labor market.

The personal consumption expenditures (PCE) price index rose

2.5% in July from a year earlier, the Commerce Department

reported, matching the gain in June. Over the most recent three

months, the annualized reading on the Fed's preferred gauge of

inflation is well below its 2% goal.

Fed Chair Jerome Powell said last week that "the time

has come" to cut rates, after a battle with decades-high

inflation that saw the U.S. central bank raising rates

aggressively in 2022 and 2023. It has kept its policy rate in

the 5.25%-5.50% range since last July.

"The recent price trends confirm that the end of the Fed's

inflation fight is coming into view," assuring a rate cut at the

Sept. 17-18 policy meeting, Ben Ayers, senior economist at

Nationwide, wrote. "The further cooling of inflation could give

the Fed leeway to be more aggressive with rate declines at

coming meetings, especially if the labor market shows a steep

deterioration."

After the release of the report, which also showed consumer

spending rising solidly, traders kept bets that the Fed will

stick to a quarter-percentage-point reduction at first, but

deliver a bigger half-percentage-point cut at a later meeting.

Financial markets continue to price in the Fed cutting

rates by a full percentage point by the end of this year. Most

analysts are predicting a bit less, given how strong the economy

has been, but say that labor market readings will drive how

aggressive the Fed ultimately is.

The U.S. central bank has gone "from being an

inflation-first Fed to a labor-first Fed," is how economists at

Evercore ISI summed up the situation on Friday.

The unemployment rate has risen nearly a full percentage

point, to 4.3%, since the Fed stopped raising rates a little

more than a year ago. That is still low by historical standards

but enough for Powell to declare that the Fed would not welcome

any further weakening.

The focus of investors as well as the Fed now turns to a run

of key data before the September meeting, including the release

of the U.S. government's employment report for August on Friday

and the consumer price index report for August in the following

week.