By Howard Schneider

WASHINGTON (Reuters) -Strong U.S. economic and inflation data continue to reshape the debate among Federal Reserve policymakers over the pace and extent of interest rate cuts as investors on Friday further downgraded their expectations for a rate reduction at the central bank’s December meeting.

In the latest round of comments on U.S. monetary policy, U.S. central bankers continued to express faith that inflation was coming under control and would allow the central bank to lower its benchmark rate over time from the current 4.5%-4.75% range, a level felt to discourage spending and investment, to a more neutral setting.

But how fast they do that, and what level represents “neutral,” remain under debate, with Fed Chair Jerome Powell on Thursday saying the economy’s continued strength meant the Fed could take its time with the discussion.

The signs of increasing hesitancy over what a month ago had been baked-in expectations for a quick run of cuts into next year come as a major political shift is underway following Donald Trump’s victory in last week’s election, with Wall Street trying to reconcile what it sees as further inflationary pressures arising in the year ahead as the incoming Republican president pushes for tax cuts, higher tariffs and a crackdown on immigration.

Fed officials have been reluctant to say they are taking that into account, but investors already are and market bets on how quickly and how much the Fed will cut rates have ratcheted down over the last week.

Boston Fed President Susan Collins said she did not see a big urgency to lower rates but did not rule out another rate cut at the Fed’s next meeting on Dec. 17-18.

“I certainly wouldn’t take December off the table. But again, we’re not on a preset path and so we’ll have a look carefully at the data and see what makes sense when we get” to the next Federal Open Market Committee meeting, she told Bloomberg TV.

And while several Fed policymakers appear to be on the fence over another rate cut in December, they have also signaled that skipping a meeting would mean they are going slower on rate cuts rather than stopping altogether.

Thomas Barkin, president of the Richmond Fed, told Yahoo! Finance that he liked how Dallas Fed President Lorie Logan put it earlier this week: that a captain should be “slowing the boat down as you approach the dock.”

DATA SURPRISES TO UPSIDE, AGAIN

Data that arrived Friday morning continued firmer than expected, with strong retail sales and rising prices for imported goods. After the data, traders reduced bets on a December rate cut to around a 60% chance from about 70% on Thursday.

Citigroup’s gauge of the degree to which incoming data exceeds consensus expectations among economists was at a seven-month high as of Thursday ahead of the stronger-than-expected retail sales figures.

Speaking to CNBC, Chicago Fed President Austan Goolsbee acknowledged that one important indicator of inflation, the Personal Consumption Expenditures price index stripped of food and energy costs, remains “too high” at an estimated 2.8% for October.

And, he said, if officials disagree on where they see the “neutral” stopping point, “it does make sense to start slowing at some point how rapidly you are getting there just to figure out … are we at neutral, are we getting close?”

But he also reiterated his broad expectation that inflation will continue to fall towards the Fed’s 2% target, and in an interview with Bloomberg TV later Friday signaled he feels the Fed will end up cutting rates by a quarter of a percentage point next month and by another full percentage point over the course of next year, as Fed policymakers projected in September.

Those projections also reflected an expectation that the policy rate would fall to 2.9% some time in 2026. Investors in contracts tied to that rate now see rates staying as much as a percentage point higher than that.

The Fed will release fresh projections in December when it makes its next rate-setting decision.

(Reporting by Howard Schneider; Editing by Andrea Ricci and Marguerita Choy)

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