WASHINGTON, June 5 (Reuters) - Federal Reserve officials' waning concern about the job market, so intense at the start of the year that it supported calls by many of them for interest rate cuts, will be tested on Friday with new data that also frames the opening debate of Kevin Warsh's term as head of the U.S. central bank.

Economists polled by Reuters expect U.S. employers created 85,000 jobs in May, a decline from the unexpectedly strong gain of 115,000 in April but enough to keep the unemployment rate unchanged at 4.3%.

After generating a monthly average of fewer than 10,000 new jobs in 2025, with hiring undercut by uncertainty around import tariffs, the Trump administration's immigration crackdown and the economic outlook, employment growth in the first four months of 2026 has averaged 76,000. That figure would have been a tepid showing in prior years, but in the context of the immigration changes, it has been enough to keep the unemployment rate more or less steady.

It also has been enough to shift the outlook for interest rates away from further cuts, with key policymakers like Fed Governor Christopher Waller saying they see the job market now as largely stable and view containing persistently high inflation as the Fed's main priority - a sentiment that may now form the majority view as Warsh oversees his first policy meeting on June 16-17.

"I can no longer rule out rate hikes further down the road if inflation does not abate soon," Waller said in remarks last month that represented a final shift away from the job market worries that had led him to support rate cuts in 2025 and continue to advocate for them through the first months of this year when he, too, was under consideration as a possible Fed chief. "Recent jobs data show that the labor market appears to be stabilizing and the unemployment rate is fairly low and stable."

That line of argument has been gathering momentum among Fed policymakers in recent weeks. Absent a major negative surprise in either the payrolls report on Friday or in inflation data to be released on June 10, Warsh may face a dilemma in two weeks.

Warsh, who took over from former Fed Chair Jerome Powell in the middle of May, argued in the run-up to his nomination for the job by President Donald Trump that interest rates could fall because the president's policies and the spread of artificial intelligence technology would lead to higher productivity and faster growth alongside slowing inflation.

The data so far are running in a different direction, with inflation seemingly stuck a percentage point or more above the Fed's 2% target and on track for a sixth straight year higher than that level. The persistence of those price pressures has led Warsh's colleagues to become more worried that the central bank's credibility could be at risk.

DELAYED RETURN TO TARGET

Some outside observers, too, see elevated inflation remaining for longer. The International Monetary Fund, for one, now does not expect inflation to return to the Fed's 2% target until the end of 2027 rather than the middle of next year because of the effects of the U.S.-backed war with Iran.

"So we've now delayed a bit further the return to target," IMF spokesperson Julie Kozack said on Thursday. "We do see sort of upside risk to inflation, and that it implies that the Fed's policy actions will need to proceed with caution and will need to be carefully calibrated to incoming data."

Three Fed policymakers dissented at the April 28-29 meeting in favor of shifting the central bank's current policy stance in a hawkish direction that would open the door to a rate hike rather than pointing towards a cut as the next most likely change. Waller has said he now agrees with that approach and other policymakers have begun talking more openly about the possible need for tighter policy - counter to Trump's expectations that rates will fall under Warsh.

Investors expect a rate hike by early next year, with the odds roughly split that the Fed will make that move at its December 8-9 meeting, according to CME Group's FedWatch tool.

Remarks by Fed officials ahead of this month's meeting emphasized "a reduced focus on labor market risks and a much heavier emphasis on inflation," with rate hikes likely later this year even if inflation just remains steady at current levels, Stephen Brown, chief North America economist for Capital Economics, wrote in a note. "For Warsh in particular, it remains to be seen whether he will adopt a less dovish tone than was the case when he was seeking the nomination."

It's a sensitive matter given Trump's expectations, the push by some of Warsh's colleagues for more hawkish monetary policy, and the U.S. midterm elections in November that may hinge on the state of the economy.

Some of the current inflation can be traced to the Iran war, now in its fourth month and responsible for an oil shock that continues to echo through the economy. Benchmark crude oil prices have fallen recently, but traffic through the strategic Strait of Hormuz off the coast of Iran remains impeded and a deal ending the conflict still has not been reached.

In economic commentary from the Fed's 12 regional districts released on Wednesday, business and community contacts sketched out the long tail of a surge in oil prices that seems to have primed other prices to continue rising as business executives pass on higher costs for things like fertilizer, shipping, and metals to consumers.

Employment, meanwhile, seemed to be holding steady even if firms continued to embrace a cautious "low-hire, low-fire" strategy.

"The big question now is do we stay patient?" Kansas City Fed President Jeffrey Schmid said on Thursday at an economic forum in Oklahoma. "Our inflation numbers have probably crept up into the 3.50% range, which nobody likes. Is it temporary ... Or do we act? Do we say, 'okay, now it's time to raise rates a quarter (of a percentage point) or two and see if we can't tamp this thing down?"