Fed to Hold Rates Longer Before Gradual Easing, ABN AMRO Forecasts

ABN AMRO analysts have released a revised outlook on U.S. monetary policy, projecting that the Federal Reserve will maintain its current interest rate stance for a longer period than previously anticipated before initiating a gradual easing cycle. The Dutch bank’s updated forecast reflects persistent inflationary pressures and a resilient labor market that are likely to keep the central bank cautious.

Revised Timeline for Rate Cuts

According to the ABN AMRO note, the Fed is expected to hold its benchmark rate steady through the first half of 2025, with the first rate cut now pushed back to the third quarter. Earlier predictions had suggested a potential cut as early as mid-2024. The analysts cite sticky core inflation readings and steady consumer spending as key factors delaying the pivot.

The bank’s economists emphasize that the “higher for longer” narrative remains intact, and that the Fed will need to see a sustained decline in inflation toward its 2% target before feeling confident enough to ease policy. They also note that the labor market, while showing some signs of cooling, remains tight enough to support wage growth, which complicates the inflation outlook.

Market Implications

For investors, the revised timeline suggests that bond yields may stay elevated for an extended period, particularly at the short end of the curve. ABN AMRO recommends a cautious approach to duration positioning, advising clients to favor shorter-maturity bonds until clearer signs of an easing cycle emerge.

Equity markets could face headwinds as well, as higher-for-longer rates tend to compress valuations, especially in growth-oriented sectors. However, the analysts point out that a gradual easing cycle, once it begins, could provide a more stable environment for risk assets compared to a rapid cutting scenario that might signal economic distress.

What This Means for Borrowers and Savers

For consumers, the extended hold period means mortgage rates and auto loan rates are likely to remain elevated through the end of 2024 and into 2025. Savers, on the other hand, may continue to benefit from attractive yields on high-yield savings accounts and certificates of deposit, though those rates may begin to decline once the easing cycle starts.

Small businesses and corporations with variable-rate debt should prepare for continued higher borrowing costs in the near term. ABN AMRO advises that companies with upcoming refinancing needs consider locking in current rates rather than waiting for a potential decline.

Conclusion

ABN AMRO’s revised forecast aligns with a growing consensus among economists that the Federal Reserve will proceed cautiously, prioritizing inflation control over supporting economic growth. While the timing of the first rate cut remains uncertain, the expectation of a gradual easing cycle provides a clearer roadmap for markets and households. Investors and consumers alike should adjust their expectations for a prolonged period of elevated interest rates before any meaningful relief arrives.

FAQs

Q1: When does ABN AMRO expect the Fed to start cutting rates?
ABN AMRO now projects the first rate cut in the third quarter of 2025, later than earlier estimates of mid-2024.

Q2: Why is the Fed expected to hold rates longer?
Persistent core inflation, a resilient labor market, and steady consumer spending are the main factors delaying the easing cycle.

Q3: How might this affect mortgage rates?
Mortgage rates are likely to remain elevated through late 2024 and into 2025, as the Fed’s prolonged hold keeps short-term rates high.