ABN AMRO expects the Federal Reserve to cut rates by 75 bps this year. It also sees policy moving toward a 3.00% Federal Funds Rate by year-end, even though inflation remains above target.
The report says a Kevin Warsh-led Fed would take a “conviction-based” approach. It adds that this could mean less transparency, with less communication and guidance from FOMC officials.
Fed Reaction Function Shift
ABN AMRO says it expects more rate cuts than the market currently prices in. It links this to a more dovish Fed reaction function over the past six months. In this view, inflation above target matters less than potential risks to employment.
Based on the current median Summary of Economic Projections, the note says there is room to keep easing in 25 bps steps. However, its base case of stronger inflation should limit near-term easing, while still pointing to a policy rate near 3.00% by year-end.
The Federal Reserve is signaling that protecting jobs matters more than squeezing out every last bit of inflation. That suggests more rate cuts than the market currently expects for the rest of the year. Under Chair Warsh, policy would be driven more by conviction and less by pre-announcing each move.
This approach is being tested now. January’s CPI shows inflation is still sticky at 3.2%, well above target. But the latest jobs report shows unemployment rising to 4.1%, keeping the Fed’s attention on the labor market. We think this supports a dovish bias and makes rate cuts in the coming months more likely.
Trading Implications
For derivatives traders, this supports positioning for lower short-term rates. Futures tied to the second half of 2026, such as Secured Overnight Financing Rate (SOFR) contracts, may be underpricing the chance of further cuts. Going long these contracts could be one way to benefit from a more dovish path.
Less guidance also means more volatility around FOMC meetings. After a calmer period, buying options such as straddles on major indices or bond ETFs ahead of policy announcements could perform well. This strategy benefits from a large move in either direction, which becomes more likely when the Fed is intentionally less predictable.
We are also watching for yield-curve steepening opportunities. If the Fed cuts short-term rates, longer-term yields may not fall as much because inflation remains persistent and the economic outlook is still fairly solid. This setup can favor trades that profit as the gap between 2-year and 10-year Treasury yields widens.
This dovish reaction function is not new. It began to appear in the second half of 2025. During that period, officials often played down strong inflation readings while emphasizing any signs of labor-market weakness. That pattern now looks like it is becoming the core policy approach for 2026.
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