A new reading from the Federal Reserve’s preferred inflation gauge showed prices increased at a slower pace in May, helping the case for interest rate cuts this year.

But despite another positive signal that inflation is easing after running hotter-than-expected in the first quarter, the central bank isn't likely to cut rates at its next meeting in late July.

The Fed will likely need more time and evidence that inflation is moving sustainably down to its 2% target, making a first cut later in the year more likely.

"It gives them more confidence that if they needed to, they could cut rates, but I don’t think they need to,” said Wilmington Trust bond fund manager Wilmer Stith, noting that economic growth is still strong.

"It’s too early to cut in the next couple weeks."

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

The Personal Consumption Expenditures (PCE) index, excluding volatile food and energy prices, rose 2.6% in May, in line with expectations and down from 2.8% in April. That marked the slowest annual gain in more than three years.

On a month-over-month basis, the inflation measure rose 0.1%, also in line with expectations and down from 0.2% in April.

The latest reading puts the Fed on track to cut as soon as September, according to Paul Ashworth, chief North America economist for Capital Economics.

Ashworth said he thinks there is a good chance that core PCE inflation will fall to 2.5% in June and estimates consumer spending in the second quarter is tracking only 1.6% now after a disappointing 1.5% gain in the first quarter.

"Consumers appear to be … finally capitulating under the pressure of higher rates,” said Ashworth, adding that "the return to the earlier disinflationary trend and new-found weakness in real activity, are both consistent with the Fed cutting interest rates as soon as this September."

The Fed raised its outlook for inflation at its last policy meeting earlier this month to 2.8% from 2.6% previously and trimmed its projection to one rate cut this year from three previously.

Ashworth said the Fed’s new inflation projection for 2.8% now looks "too pessimistic."

Ahead of this morning’s inflation reading, Atlanta Fed president Raphael Bostic said Thursday that the most recent inflation reports "offer signals that push against the 'stalling out' narrative" that took hold during the first quarter.

Bostic said he expected progress toward the Fed’s 2% inflation target to come more slowly than previously hoped but noted that inflation didn’t need to get all the way to 2% before cutting rates.

"Rather than holding the federal funds rate steady until we are at the target, I would favor reducing the policy rate once I gain additional confidence that we are clearly on the path to the 2% objective," he said.

Bostic is still looking at a rate cut in the fourth quarter, though he’s not locked in on that. He said he could see scenarios for more cuts, no cuts, or even a raise.

Fed Governor Michelle Bowman said Tuesday that she did not believe the Fed was “at the point where it is appropriate to lower the policy rate,” noting that she is willing to raise rates at a future meeting if progress on inflation stalls or reverses course.

Bowman said inflation is still elevated and sees a number of upside risks to inflation, including geopolitical events that could disrupt global supply chains and a risk that an increase in immigration coupled with a strong job market could push up core services inflation.

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