Mark Cabana, Head of US Rate Strategy at BofA Securities, shared his views on the Fed's upcoming policy moves and its ongoing fight against inflation.
Speaking on CNBC's Squawk Box, Cabana predicted what he called a “hawkish rate cut” tomorrow as the central bank maneuvers to stabilize economic conditions while maintaining its resolute stance on keeping inflation under control.
“The Fed believes it has been in a restrictive stance for a long time and aims to normalize monetary policy,” Cabana said. He noted signs of moderation in the labor market, including a slight increase in jobless claims and a cooling in employment data, while inflation remains persistent. The central bank likely fears that delaying a rate cut could disrupt markets and force it to ease gradually, Cabana said.
Cabana said the Fed will continue to closely monitor inflation expectations, which he called the “first most important” indicator. If inflation persists or accelerates again, the Fed could be forced to reverse course and raise rates again, an outcome that is not currently in market forecasts.
“Inflation that has been above target for four or five years could push expectations even higher, forcing the Fed to tighten again,” Cabana warned.
Cabana also addressed concerns about the growth of the $36 trillion-plus U.S. debt and its impact on interest rates. While the Fed remains primarily focused on inflation and employment, rising interest costs could put upward pressure on long-term rates. Bond markets are already reflecting this concern, with 30-year Treasuries trading at a significant discount to the expected path of overnight yields.
Looking ahead, Cabana sees rates holding steady if inflation cools along with the labor market. But any signs that inflation is accelerating again could sharply change the outlook, especially for longer-term yields.
*This is not investment advice.
