The path of least resistance for the Fed is to hike rates, says BofA’s Mark Cabana

Summary

Mark Cabana discusses heightened uncertainty ahead of the Fed meeting, the historically unusual 35% market-implied probability of a rate hike, and how a surprise hike could paradoxically lower long-end Treasury yields. He also highlights Fed governance dynamics: two dissents are likely on a hold, while a hike would likely produce none.

• Market pricing implies a ~35% chance of a Fed rate hike today, a very unusual level of pre-meeting uncertainty.
• A hike would be unprecedented given the market's historical tendency to price at least a 60% probability of a move.
• Recent data (softer CPI, less-strong labor) argue against urgency, but hawkish Fed rhetoric keeps the hike scenario alive.
• If the Fed does hike, Cabana expects the surprise to dial back growth expectations and trigger risk-off, pulling long-end yields lower.
• Long-end rates could decline as a result of lower growth outlook and potential safe-haven flows.
• From a dissent management perspective, a hold is likely to produce two dissents, while a hike would yield none—making a hike the path of least resistance for internal cohesion.
• Cabana notes that Chair Warsch remains a relative stranger to markets, and his reaction function is still being discovered.