Using the new feature (“all categories muted”) to what is being asked for here is like using hammer in place of a scalpel. Imagine if bookmarking didn’t exist, no one would want to implement that using this new feature.
Favoriting categories (and tags too) also has nothing to do notification level, mixing those two things together is very confusing; specially now that notifications levels have a “bell” icon.
Creating favorites is basically about users creating a feed of topics they are likely interested in for the same purpose as the Bookmark feature. In fact I think it should work identically to bookmarks from how its enabled/disabled, optional placement in tab bar, etc. The only additional item would be a “Star” button by the category notification level button.
Why favorite categories and tags? Some communities are large enough, that scrolling the topic feed is simply tedious. That doesn’t mean I want those categories or topics hidden if I do want to see all latest across the community, or if someone mentions a user that is not favorited that category or tag.