Big Day Tomorrow: Analyst Said, "FED Will Cut Interest Tomorrow," But Issued a Very Important Warning!

Mark Cabana, BofA Securities' US Interest Rate Strategy Head, shared his views on the Fed's upcoming policy moves and its ongoing battle against inflation.

Speaking on CNBC's Squawk Box program, Cabana made a forecast for tomorrow, describing it as a 'hawkish interest rate cut' due to the central bank's maneuvers to balance economic conditions while maintaining a resolute stance on controlling inflation.

Cabana said, “The Fed believes it has been in a restrictive stance for a long time and aims to normalize its monetary policy.” He pointed out signs of moderation in the labor market, including a slight increase in unemployment claims and a cooling in employment data, while inflation continues to persist. Cabana said the central bank is afraid that delaying a rate cut could unsettle the markets and force them to gradually loosen their hands.

The Fed stated that it will continue to closely monitor inflation expectations, which it describes as the 'most important first' indicator. If inflation continues or accelerates again, the Fed may need to reverse its course and raise interest rates again, which is a result not currently included in market forecasts.

Cabana warned, "Inflation persisting above target for four or five years could push expectations even higher and prompt the Fed to adopt a tighter stance".

Cabana also touched on concerns about the growth of the US debt, which exceeds 36 trillion dollars, and its effects on interest rates. While the FED continues to focus primarily on inflation and employment, increasing interest costs may create upward pressure on long-term interest rates. Bond markets already reflect this concern, and 30-year Treasury bonds are trading at significant discounts to expected overnight rates.

Cabana expects interest rates to remain unchanged if inflation cools down along with the labor market. However, any indication that inflation will accelerate again could sharply change the outlook for long-term yields.