No surprises, new uncertainties: Fed’s steady hand faces change

February 5, 2026

The Federal Reserve held rates steady in January, with markets eyeing possible cuts later in the year. But the nomination of Kevin Warsh as the next Fed chair adds uncertainty to the future direction of policy. Meanwhile, resilient labor markets and cautious investor sentiment set the stage for a dynamic year in lending, derivatives and agribusiness. The AI surge continues unabated, except for mounting concerns about the affordability of electricity.

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Interest rates

No rate cut, no surprise; will a new Fed chair change the game?

Jeff Milheiser

The Federal Reserve Board’s Jan. 28 decision to keep the federal funds rate steady in a range of 3.5% to 3.75% came as no surprise. Markets hadn’t expected a cut and Chair Jerome Powell commented that policy is “well-positioned” for now, especially with inflation still running a bit hotter than preferred.

Investors continue to anticipate one or two rate cuts later in the year, with June emerging as the earliest realistic window. No movement is currently anticipated in the Fed’s March and April meetings (there is no February meeting).

What complicates the outlook is President Trump’s nomination of former Fed governor and Stanford University lecturer Kevin Warsh as Fed chairman. With Powell’s term ending in May, the leadership question introduces a genuine wild card.

If confirmed by the Senate, Warsh could try to steer policy differently, but any shift would still require consensus from the 12 voting members of the Federal Open Market Committee, which has signaled a steady, independent stance.

Meanwhile, the labor market remains surprisingly resilient. Unemployment has ticked up slightly but remains historically low, suggesting that — at least for now — the jobs picture isn’t pressuring the Fed to move any faster.

Jeff Milheiser is vice president, Funding and Investments in CoBank’s Treasury group. Jeff graduated from Purdue University and has been with CoBank for more than 23 years.

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Derivatives

After a busy year-end, hedging takes a breather amid market jitters

Eric Nickerson

Customer hedging activity took a noticeable breather in January after a busy year-end push.

Late last year, borrowers were rushing to lock in rates as they closed financings, which naturally boosted derivative activity. Over the past month, though, activity has slowed, with a big part of that pause due to uncertainty.

All eyes are on the Fed — its outlook, its messaging and even the question of what might come with the president’s nomination of former Fed governor Kevin Warsh as the next Fed chair. Add in shifting administration narratives, from trade policy to geopolitical comments, and markets have been reacting to every twist.

Borrowers have been eager to talk about these forces, but many are firmly in wait-and-see mode until the picture becomes clearer. For now, that caution is translating into lighter hedging flows compared with last year’s finish.

Eric Nickerson is CoBank’s head of Customer Derivatives. He has 25 years of experience providing financial risk solutions to corporate and financial institutions. Eric joined CoBank in 2019 after 19 years in the securities industry.

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Capital markets

Primary market lending set to surge after stop - start 2025; CLO demand powers secondary market

Craig Smith (primary market) and Todd Helman (secondary market)

The primary loan market moved through 2025 at an uneven pace, with lenders and debt investors eager to invest while companies were slow to borrow. That imbalance is expected to shift in 2026.

Two key factors are aligning to fuel a borrowing surge: continuing investment in AI data centers and energy infrastructure, along with a wave of M&A and LBO activity that has been paused. 

Much of the pent-up deal flow was driven by stricter merger approval processes under the previous administration, high SOFR rates that made transactions harder to justify and last year’s tariff fluctuations, which fueled uncertainty. Despite those factors, the primary market appears ready to accelerate.

The secondary loan market ended 2025 on an unexpectedly strong note, even after a year filled with tariff tensions, rate-cut debates and plenty of other headline noise.

Spreads narrowed significantly across the rating categories, largely driven by record CLO formation — now about 70% of the market — which more than offset retail outflows from mutual funds and ETFs. Prices also rebounded from spring lows near 93 to over 97 by year-end, marking one of the fastest growth years in the past decade.

Although some softness emerged in late January/early February, demand from CLOs during 2026 should remain steady thanks to the support of long-term institutional investors. The biggest unknown is supply. If issuance increases, spreads could widen, especially if falling rates encourage investors to favor fixed-rate products. But for now, the market appears focused on headlines and issuance.

Craig Smith is managing director, Capital Markets, at CoBank. Prior to joining CoBank in 2019, he worked in investment banking and as an M&A, securities and banking attorney.

Todd Helman is a lead relationship manager for Loan Sales and Facilitation in CoBank’s Capital Markets Group. Todd joined CoBank in 2023 from Waveson Capital. He also held positions at Huntington National Bank, BBVA USA and S&P Global Ratings. 

Market Focus

Agribusiness

Surviving tough times takes deep roots: Ag faces another difficult year with a sprinkle of opportunity

Marcus Wilhelm

Farmers across the country finished 2025 feeling the strain of one of the toughest operating years in recent memory. In the Midwest, more than half of local grain cooperatives ended the fiscal year with negative net income — demonstrating how rising personnel costs, stubbornly high insurance expenses and higher borrowing costs squeezed margins from every angle.

The challenges weren’t limited to the heartland. The East and West experienced similar pressures, while California also struggled with fundamental structural problems caused by decreasing demand for wine, oversaturated tree-nut markets and declining land values in specialty-crop regions.

Looking ahead, 2026 isn’t expected to bring a dramatic turnaround. But it’s not all gloom. Pockets of the grain market have shown stronger margins. U.S. corn exports remain strong, helped by a weakening dollar. Ethanol demand reached a milestone in November, reaching an 11% blend rate for the first time, and livestock markets remain generally strong.

As we move further into 2026, most producers still have solid balance sheets, but it’s not a business-as-usual environment. Belt-tightening and proactive management remain essential. Volatility can create opportunity if you’re in a position to take advantage of it.

Marcus Wilhelm is Western region president of CoBank’s Agribusiness Banking Group, based in Omaha. Marcus also co-owns an 800-acre corn and soybean family farm in Unadilla, Nebraska.

Recent CoBank Capital Markets Activity

Michigan Milk Producers Association

Michigan Milk Producers Association

$160 Million Credit Facilities
Administrative Agent and Lead Arranger

tyson foods, inc.

Tyson Foods, Inc.

$750 Million Credit Facility
Administrative Agent and Lead Arranger

ag processing inc a cooperative

Ag Processing Inc A Cooperative

$500 Million Credit Facility
Administrative Agent, Issuing Lender and Swingline Lender

Digital Infrastructure

Rural America becomes front runner in the race to build out AI infrastructure

Jeff Johnston

Hyperscalers are roaring into rural America to construct massive AI data centers. Numbers are still coming in, but capital expenditures from Meta, Microsoft, Amazon and Google are expected to have topped $400 billion in 2025.

Traditional tech hubs can no longer supply the land and power required for this unprecedented build-out. Rural regions offer the scale tech giants need — vast acreage for campuses that can span half the size of Manhattan and proximity to major energy infrastructure.

The shift is driven by both business urgency and geopolitical pressure. Companies like Google need to expand their AI capabilities to protect core revenue streams, while the U.S. government views AI leadership as essential to compete with China. Because the most energy-intensive AI work — model training — is location agnostic, rural communities are ideal hosts for these facilities.

For those communities, the implications are enormous. Hyperscalers are investing heavily in local governments, schools and power generation, creating long term economic growth. While rapid expansion brings challenges — and not very many permanent jobs — the recurring tax revenue and minimal ongoing infrastructure strain make AI data centers a generational opportunity for rural areas.

See the full report.

Jeff Johnston is lead economist, Digital Infrastructure at CoBank. Prior to joining CoBank in 2018, Jeff was an equity analyst covering the tech, media and telecom sectors, and held senior management positions in the telecommunications industry.

Recent CoBank Capital Markets Activity

United Telephone Company

United Telephone Company

$235M Credit Facilities
Lead Arranger and Bookrunner

Data Center

Data Center

$18B Credit Facilities
Coordinating Lead Arranger and Joint Bookrunner

Fiber Provider

Fiber Provider

$370M Credit Facilities
Lead Arranger and Bookrunner

Power & Energy

The hyperscaler power debate: Who pays?

Brock Taylor

As hyperscalers race to build AI data centers in rural America, policymakers and rural electric cooperatives are scrambling to keep those costs off household bills.

In December, PJM Interconnection’s capacity auction cleared at record-high prices, spotlighting the strains on affordability and reliability. Federal and state policymakers responded with a Statement of Principles, calling for emergency procurement alternatives and protections for residential users, highlighting new large-load users such as data centers.

The industry faces a challenge because the market mechanism may not be well-suited for the emergence of large loads. When there is an imbalance among buyers in a socialized cost or risk pool, the main issues are adverse selection, inefficient pricing or rationing and market instability.

Attempting to fix this problem outside the market, through emergency auctions or marginal pricing structures, might not resolve the timing mismatch between demand and supply. In the long run, these large buyers will invest in ways that benefit the pool but, for now, there are no simple solutions.

Rural cooperatives face the same pressure.

In early December, Basin Electric signed an MOU with NextEra Energy Resources to explore a 1,450-megawatt combined cycle gas plant to serve a proposed multi gigawatt data center in North Dakota. Basin structured the deal under a Large Load Commercial Program, which is designed to reliably serve new, high-demand energy users while insulating cooperative members from significant cost burden associated with the load.

Basin’s approach could serve as a useful model. The key question remains: Should consumers be protected from the costs of AI build-out, with hyperscalers covering the full incremental expense?

Just another stroll on the tightrope.

Brock Taylor is responsible for the operation of CoBank’s Power, Energy and Utilities banking platform. He joined CoBank in 2006 and has held roles across various business lines, including Corporate Agribusiness, Electric Distribution and Power Supply.

Recent CoBank Capital Markets Activity

Blackcomb and Traverse Pipeline, LLC

Blackcomb and Traverse Pipeline, LLC

$2.9B Credit Facilities
Coordinating Lead Arranger and Bookrunner

Georgia Transmission, LLC

Georgia Transmission, LLC

$525M Credit Facilities
Lead Arranger, Sole Bookrunner and Administrative Agent

Algodon Solar Energy, LLC

Algodon Solar Energy, LLC

$288.5M Credit Facilities
Lead Arranger, Sole Bookrunner and Administrative Agent

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