Inflation in the United States showed signs of cooling off in May, according to the latest reading from the Federal Reserve's preferred inflation gauge. The report indicated that prices increased at a slower pace, providing support for the case of interest rate cuts later this year. However, despite this positive signal, the central bank is unlikely to implement rate cuts at its next meeting in late July. The Federal Reserve is expected to take a cautious approach and wait for more evidence that inflation is moving sustainably towards its 2% target before making any decisions.

The Personal Consumption Expenditures (PCE) index, which excludes volatile food and energy prices, rose 2.6% in May, aligning with expectations and down from April's 2.8%. This marked the slowest annual gain in over three years. On a month-over-month basis, the inflation measure increased by 0.1%, also in line with expectations, down from April's 0.2%.

According to Wilmer Stith, a bond fund manager at Wilmington Trust, the slowdown in inflation gives the Federal Reserve more confidence that they have the option to cut rates if necessary. However, Stith believes that the current economic growth is still strong, and therefore it is too early to implement rate cuts in the upcoming weeks.

Paul Ashworth, chief North America economist for Capital Economics, believes that the latest reading puts the Federal Reserve on track to cut rates as early as September. Ashworth predicts that core PCE inflation will fall to 2.5% in June, and second-quarter consumer spending is estimated to only track at 1.6%, following a disappointing 1.5% gain in the first quarter. He suggests that these factors, combined with a return to disinflationary trends and weakness in real activity, support the possibility of rate cuts in September.

During the Federal Reserve's recent policy meeting, their outlook for inflation was raised to 2.8% from 2.6% previously, but projections for rate cuts were reduced to one from three. Ashworth suggests that the revised inflation projection of 2.8% appears to be too pessimistic.

Atlanta Fed president Raphael Bostic acknowledged that recent inflation reports countered the narrative of the economy stalling in the first quarter. While Bostic expects progress towards the 2% inflation target to be slower than originally anticipated, he did not rule out rate cuts before inflation reaches the target. Bostic proposes reducing the policy rate once there is clear evidence of progress towards the 2% objective. He currently envisions a rate cut in the fourth quarter but remains open to various scenarios, including more cuts, no cuts, or even a raise.

Fed Governor Michelle Bowman expressed her belief that it is not yet appropriate to lower the policy rate. She highlighted the continued elevation of inflation and indicated that there are upside risks to inflation, such as geopolitical events impacting global supply chains and the potential for increased core services inflation due to a surge in immigration coupled with a strong job market.

In conclusion, while inflation shows signs of easing, the Federal Reserve faces a dilemma regarding interest rate cuts. They are likely to wait for further evidence of sustained inflation decline before implementing any rate cuts, possibly postponing them until later in the year.