(Reuters) - U.S. job growth likely maintained its moderate pace in May and wage gains were expected to hold steady, which would keep the Federal Reserve in wait-and-see mode on interest rates but likely encourage bets the central bank will lower borrowing costs at least once this year.

The Labor Department's closely watched employment report on Friday is also expected to show the unemployment rate remained below 4% for the 28th straight month. While the labor market has softened in recent months, its still-solid clip has allowed the Fed to take its time so far in deciding when to begin cutting interest rates.

The U.S. central bank is expected to leave its benchmark overnight interest rate unchanged next week in the current 5.25%-5.50% range, where it has been since last July.

The employment report "will provide further evidence that the labor market isn't as strong as it was a year ago and that it is converging towards a less inflationary balance," said Lydia Boussour, a senior economist at EY-Parthenon.

Nonfarm payrolls likely increased by 185,000 jobs last month after rising by 175,000 in April, according to a Reuters survey of economists. That gain would be below the average of 242,000 in the prior three months.

Estimates ranged from 120,000 to 258,000. The labor market continues to show resilience despite an aggressive rate hiking cycle that saw the Fed raise its policy rate by 525 basis points since March 2022 to slow demand in the overall economy.

Financial markets have latched onto the idea of a downside miss on job growth on Friday, with the 10-year U.S. Treasury yield hovering near its lowest level in about two months this week and indications of a hiring slowdown among small businesses.

There are other signs that the job market is beginning to loosen more steadily, and the U.S. central bank is closely monitoring labor market conditions and economic growth to ensure it doesn't keep rates too high for too long and cool the economy too much as it tries to return inflation back to its 2% target.

Overall economic output in the first quarter grew at the slowest rate in nearly two years and data so far in the current quarter on balance has been weaker than expected.

Economists broadly expect the job market to continue to soften in the months ahead as supply and demand for workers continues to normalize.

Data earlier this week showed job openings declined in April and the number of available jobs per job-seeker reached its lowest level since June 2021.

'SURPRISING RESILIENCE'

Average hourly earnings are forecast to have risen 0.3% last month, after an increase of 0.2% in April, while wages are forecast to jump 3.9% in the 12 months through May, matching April's increase, which was the lowest in three years. Wage growth in a 3%-3.5% range is seen as consistent with the Fed's inflation target.

The Fed is expected to cut its policy rate in September and once more later in 2024, according to a majority of forecasters in a Reuters poll that nevertheless also showed a significant risk the central bank will opt for only one cut or none at all.

The unemployment rate is forecast to be unchanged at 3.9% in May. The labor market has benefited from a surge in immigration over the past year, which could allow for a stronger pace of job gains without causing renewed inflationary wage pressures.

What remains unclear is how much a pullback in small businesses' hiring plans, a dampening in consumer demand, and dented profitability will filter through to tempering job gains in the months ahead.

"The job market has demonstrated surprising resilience ... this consistent performance supports incomes and household finances. Even so, folks are still agitated and financially pressured by prices and interest rates," said Mark Hamrick, senior economic analyst at Bankrate.