NextFin News - Bank of America's Mark Cabana has a question for the Federal Reserve ahead of its October 27-28 policy meeting: with inflation still running well above target and the labor market holding firm, why wait to raise rates again? The co-head of global rates strategy at BofA Securities, said in an interview on October 21 that the coming decision is a test of the new Fed chair's credibility - and argued that delay only makes the central bank own the inflation problem more completely.
The provocation lands at a moment when the market is genuinely split. The federal funds target range sits at 3.75%-4.00% after a unanimous 25-basis-point increase in mid-September, the latest move in a renewed tightening cycle. Yet CME's FedWatch tool showed only a 17% chance of another hike at the October meeting as of October 2 - down from nearly 36% a week earlier and roughly 70% on the Kalshi prediction market before the September employment report. Cabana's "why wait now?" is, in effect, an argument that the market is wrong, and that the Fed should act before inflation expectations unanchor rather than after.
The Setup: A Fed at an Inflection Point
The facts Cabana is weighing are unforgiving. Inflation has now been above the Fed's 2% objective for 66 consecutive months, by the chair's own count in recent congressional testimony. September's consumer-price report showed all-item prices rising 3.7% over the year, up from 3.4% in August, with a 0.6% monthly increase; core prices, which strip out food and energy, rose 2.6% year over year and 0.3% for the month, according to the Labor Department. The Cleveland Fed's nowcast puts core PCE - the Fed's preferred inflation gauge - near 3.1% for October, comfortably above target with no decisive downward trajectory.
That combination - sticky inflation plus a resilient jobs market - is precisely the mix that makes a central banker hawkish. With downside risks to employment reduced and unemployment near 4%, the Fed has less cover to wait. The Beige Book has noted robust price growth and wage pressures across multiple districts. Cabana's point is that waiting is not neutral: every month inflation stays above target without a policy response, the more the public comes to see 3% as the new normal, and the more expensive the eventual correction becomes.
There is also a leadership dimension. Chair Kevin Warsh took office with a mandate to restore price stability, testifying before Congress on July 14 that the committee is committed "to put these years of high inflation behind us." A new chair typically wants to establish credibility early, and Cabana has argued before that a chair who waits too long ends up owning the inflation problem entirely, with no predecessor left to blame. Acting now lets him frame the fight on his own terms.
BofA's own economists have moved decisively in this direction. In June the bank reversed a hold call and began forecasting three quarter-point rate increases in 2026 - 75 basis points in total. "The Fed's inflation problem has gotten unambiguously worse," wrote BofA economist Aditya Bhave. Chief Investment Officer Chris Hyzy has said the firm now sees "no new rate cuts until at least mid-2027, and the chances of a .25% increase in the next year have grown." That is a dramatic pivot from the bank's December 2025 outlook, which called for two cuts during 2026 and a 10-year Treasury yield ending the year at 4%-4.25%. Yields have instead surged above 5%.
Why the Market Is Hesitant
If the case for hiking is so clear, why isn't the market pricing it in? The answer is that traders have been burned before. Since 1994, the Fed has never delivered a surprise hawkish hike with less than 60% of the move priced into fed funds futures, according to BofA's own research. A hike at the October meeting, with only about 17% priced, would break that three-decade norm - and surprise moves from the Fed tend to trigger disorderly repricing across bonds, equities, and the dollar.
There is also genuine uncertainty about what a hike would signal. Cabana himself laid out the transmission channel in July: a hike would be a surprise, growth expectations would dial back modestly, and risk assets probably would not like it. In other words, the hike works not just through the 25 basis points itself but through what it says about the Fed's reaction function - and it is that signal, not the mechanical move, that ultimately drags the long end of the curve down. The market is waiting to see whether the Fed is willing to pay that price.
"The path of least resistance for the Fed is to hike rates," Cabana said in July, before the September increase.
And the data is not uniformly hot. Core inflation has shown signs of easing on a monthly basis even as the annual rate re-accelerated, and the geopolitical conflict that sent oil prices higher has since eased - removing one of the main impulses behind the September re-acceleration. Hiking into a decelerating core print risks overtightening, the classic Fed error that ends in recession.
The Bigger Question: Cyclical Blip or Structural Shift?
Underneath the tactical debate is a deeper call, and Cabana's "why wait now?" only makes sense if you believe it. Is the current inflation a cyclical re-acceleration - an energy and geopolitical shock that will fade once oil settles back toward $70 - or a structural regime shift that will not self-correct?
The structural case has grown stronger in 2026. Deglobalization, fiscal deficits running well above peacetime norms, and AI-driven capital expenditure are all lifting the neutral rate. The 10-year Treasury yield climbed above 5% for the first time since 2007 - touching 5.04% on September 15 and closing around 5.12%-5.15% in the week of October 20 - and with core PCE near 3%, real yields are now roughly 2 percentage points above inflation, the widest spread since before the global financial crisis. The 2s10s spread has steepened to about 38 basis points, and the 10-year term premium - the extra compensation investors demand for holding duration risk - stood at 1.08% as of early October, its highest level in years.
That term-premium move is the tell. A cyclical inflation spike does not normally lift the term premium by a full percentage point; that is the market pricing a permanent regime change - more debt supply, more inflation risk, a higher neutral rate. If that structural read is right, waiting is costly. A central bank that treats a structural shift as cyclical falls behind the curve, hikes more later, and causes a deeper downturn. If the cyclical read is right, hiking now is a policy error that needlessly slows growth. Cabana is betting on the former.
History offers a cautionary analog. In 1994, the Fed hiked preemptively as growth accelerated and inflation was still low - a move that initially shocked the bond market but is now credited with extending the expansion. In 2004, it tightened gradually and telegraphed every step, avoiding a market shock but arguably staying too loose for too long. Cabana's "why wait now?" is a 1994-style argument: move early, take the credibility hit, and buy the right to cut later if you are wrong. The cost of being wrong in 1994 was a bond-market rout; the cost of being wrong in 2026, with the term premium already this elevated, could be a much steeper repricing.
The Counter-Case
The strongest argument against Cabana is BofA's own. In July, the firm wrote that "history says the Fed does not surprise hawkish with hikes," and Cabana's base case then was a hold with two dissenting votes for tightening. The logic still holds: surprising the market invites volatility, and with the October meeting priced as a hold, a hike would be a self-inflicted shock. Monetary policy also works with a lag of 12 to 18 months; the September hike has not yet fully worked through the economy. Adding another 25 basis points before seeing the effect of the first could push the Fed past neutral without anyone realizing it until a recession is already underway.
There is a second, sharper version of the counter-case: BofA's own 2026 outlook, published in December 2025, forecast two rate cuts for the year and a 10-year yield ending 2026 at 4%-4.25%. Rates have instead surged above 5%. A strategist whose firm called for cuts six months ago is now urging immediate hikes - which is either a clear-eyed recognition that the regime changed, or evidence that the reaction to every inflation spike is to extrapolate it forever. Investors are entitled to ask which.
And there is a third strand: the labor market may be softer than it looks. The September employment report was weak enough to knock October hike odds down from 36% to 17% in a single week. If payrolls continue to disappoint, the Fed will have a second mandate - maximum employment - pulling against the inflation fight, and a chair who hikes into a weakening jobs market risks a political and economic backlash that a new Fed leader can ill afford.
What Would Prove Cabana Wrong
This is a falsifiable call. If core PCE prints below 0.2% month over month for two consecutive months while the unemployment rate rises above 4.5%, the "hike now" thesis breaks: the Fed would be looking at cuts, not hikes, and waiting would have been the right call. Conversely, if core PCE holds above 0.3% monthly and wage growth re-accelerates, Cabana's warning will look prescient - and the market will be forced to price a much steeper tightening path than the roughly three hikes currently embedded in the 2026-2027 fed funds curve.
What to Watch
The October 27-28 FOMC meeting is the first test. Watch the statement language for any shift in the inflation-risk balance, the dot plot for how many hikes officials now see by year-end 2026, and Chair Warsh's press conference for signs of impatience. The December 9 meeting is where the real decision likely lands - CME's FedWatch tool showed odds above 75% for a hike there as of early October, with the Kalshi prediction market at 65%.
For investors, the asymmetry is clear. If Cabana is right, the long end of the Treasury curve is still cheap and the dollar - trading around 101.7 on the ICE index - has further to run. If he is wrong and the Fed holds through year-end while inflation cools, the 10-year yield could fall back toward 4.5% and risk assets would rally. The market is pricing the middle; Cabana is pricing the tail.
The bottom line: "why wait now?" is less a forecast of a specific meeting outcome than a challenge to the Fed's reaction function. The central bank can afford to wait only if it believes inflation is cyclical. If it believes the regime has changed, every month of delay is a month of credibility lost - and credibility, once spent, is far more expensive to rebuild than 25 basis points is to reverse.
Outlook: Three Scenarios for the Path Ahead
The road from here splits three ways, and the time horizon matters as much as the direction.
In the short term - the October 27-28 meeting itself - the base case remains a hold, with the Fed preserving optionality and letting the December decision absorb the next two inflation prints. A hike at this meeting would require a core PCE print well above 0.3% and a labor report that undoes the September softness; neither is the consensus expectation.
Over the medium term - the next two quarters - the base case is one to two hikes, most likely in December and again in early 2027, conditional on core inflation holding near 0.3% monthly. The upside case for rates is three hikes by mid-2027 if oil re-accelerates and wage growth picks up; the downside case is no further tightening at all if core PCE rolls over toward 0.1%-0.2% and unemployment drifts above 4.5%.
Over the long term, the structural question dominates. If the term premium stays elevated near 1% and the 10-year yield holds above 5%, the market is telling the Fed that the neutral rate has risen permanently - and Cabana's structural call will have won. If the term premium compresses back toward 0.5% and the 10-year yield settles in the low-to-mid 4% range, the 2026 inflation spike will have been cyclical after all, and the Fed's patience will be vindicated.
For now, the burden of proof sits with the waiters, not the hikers. With core inflation above 3%, real policy rates barely positive, and a term premium that has already repriced for a new regime, "why wait now?" is the harder question to answer - even if the market, and perhaps the Fed, chooses to wait anyway.
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