I play using a controller. After reading some threads, I see you can bind hotkeys by highlight and item in the favorite menu and pressing 1-8 for a moment. It also works with the D-Pad on my controller, but it only lets me use Left and Right.

I can not bind a favorite item to Up, Down, or any diagonal

yeah its stupid i know. the hot keys svck this time. really slows down gameplay. wish they kept the oblivion hotkeys.