Fed expected to make at least one more rate increase before pausing; sticky core inflation remains a concern

April 28, 2023

The Takeaway is a CoBank e-publication that provides practical commentary on interest rates, derivatives and capital markets activities. These insights come from the professionals in CoBank’s Treasury and Capital Markets groups—people who are in the market interacting with customers, investors and other lenders seeking to understand what is driving activity.

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Interest rates: markets price in another rate increase, then a pause?

While the financial markets have been yearning, since the fourth quarter, for a halt to the steady rise in interest rates, the Fed probably isn’t done just yet, according to Kiran Kini, CoBank senior vice president and treasurer.

“The market is pricing in for the Fed to hike interest rates another 25 basis points—one-quarter of one percent—at its upcoming meeting on May 2 and 3,” said Kini. “That is consistent with what we are hearing from the Fed.

“There is a camp within the Fed that wants to pause the rate increases, and my view is that they should pause,” Kini continued. “Market conditions are still fragile, but it seems clear that they will make another increase given that things have settled down in the banking system. They also don’t want to repeat the mistake of falling behind in rate increases, which they did at the beginning of this inflation cycle. I do, however, expect the Fed to pause raising rates after this meeting.”

Kini also noted that price inflation—the impetus for the rate increases—continues to cool, although not to the level the Fed wants.

“Headline inflation has come down quite a bit because of energy prices declining,” said Kini. “Core inflation has come down, and rents have started to come down as well. But the Fed is looking at a measure called super core, which excludes housing because it takes a longer time for rents to come down.

“The Fed is pleased with the trajectory, but core inflation excluding housing has remained surprisingly sticky,” he added. “They're worried that if they don't see more progress, there will be more work to do. So inflation has indeed come down, but not to the Fed’s satisfaction.”

Kini also noted that the Fed is not terribly concerned about strong employment. A positive sign is that upward pressure on wages is abating.

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Interest rate management: the crystal ball remains cloudy

Customer interest rate management activity remains focused on two primary areas—the nearing deadline on LIBOR interest rate conversions and making sense of the current interest rate market.

“The permanent phase-out of LIBOR and the shift to SOFR (Secured Overnight Financing Rate) is now less than 10 weeks away,” said Eric Nickerson, CoBank’s sector vice president of customer derivatives. Customers who haven’t made the transition yet are actively moving in that direction.

“Beyond that, we are working with customers in trying to make sense of the current interest rate environment,” he continued. “The yield curve continues to be inverted—where long-term rates are lower than short-term rates—and customers are using that to lock in more favorable long-term rates. The question becomes what the Fed does after this next anticipated rate increase and how customers make sense of that in terms of their cost of capital.”

Nickerson added that while a recession is still expected, there is a great deal of uncertainty around its potential magnitude. 

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Risk: in the banking world, CoBank is...well…different

While some of the country’s largest commercial banks reported robust first quarter earnings, the March travails of four banks—Silicon Valley Bank, Signature Bank, First Republic and Credit Suisse—still have many depositors on edge.

The uncertain economic environment with rising interest rates and the threat of recession—abetted by the ever-looming specter of risk—are adding to the angst.

Risk is a factor for every institution. But Clarence Plummer, senior vice president, Capital Markets at CoBank, says that CoBank customers should understand how CoBank differs from traditional commercial banks.

“Every bank—in fact, every business entity—has risk. It’s a fundamental challenge of doing business,” said Plummer. “Sound business management begins with understanding risk and taking steps to manage the risk factors within your control.

“With that, CoBank has some fundamental differences from commercial banks,” Plummer continued. “First is that CoBank is not authorized to hold deposits. We raise the funds we lend to our customer-owners by issuing debt securities—notes and bonds—which are sold to investors. We also maintain a large amount of liquidity to meet all our customers’ borrowing and liquidity needs.”

Plummer also noted CoBank’s cooperative ownership structure.

“CoBank is a government-sponsored enterprise that is owned by its customers,” Plummer said. “We’re not publicly owned like most large commercial banks, which means we’re managing for the long term, not on a quarter-to-quarter basis.”

From a governance and oversight perspective, CoBank’s board of directors is populated primarily by customers from the rural areas served by the bank. The board consists of 14 elected directors from six voting regions around the country as well as two appointed directors and two outside, independent directors with no customer or Farm Credit affiliation.

“CoBank is owned and governed by its customers,” said Plummer. “This ensures that customer interests—which include maintaining the safety and security of the bank—are always at the forefront.”

Plummer noted that CoBank’s recently released 2022 annual report is available on the CoBank website.

Market Focus


The calm before the storm…in some places

With the spring planting season and winter wheat harvest just weeks away, it’s decision time. And, as usual, the weather is helping in some places and not helping in others.

“Drought is seriously affecting western Kansas,” said Eric Gorman, senior transaction origination management officer in CoBank’s Capital Markets division. But record precipitation in California has left surface water allocations at 100 percent, which could be cause for short-term optimism. Multiple drought years combined with the implementation of groundwater management plans will continue to make water management a long-term challenge there.

“As we approach mid-May, regional weather along with price expectations are going to drive farmers’ decisions to plant either corn or soybeans. Like last year, it may come down to a last-minute decision. But planting was late last year, and things generally turned out well,” Gorman said.

Gorman noted that commodity prices have dropped over the past several weeks because some hedge fund investors sold their positions to improve liquidity.

“The hedge fund activity had nothing to do with underlying fundamentals,” Gorman said. “It came primarily as a result of the issues in the banking sector, and we could start to see a bit of a correction.” 

Gorman also said that capital expenditures have slowed and that farmers appear to be deferring expenses due to the higher interest rate environment and in anticipation of a potential recession.

Recent CoBank Capital Markets Activity

Darling Ingredients

Darling Ingredients

$300M Credit Facility
Joint Lead Arranger & Bookrunner

Land O’Lakes

Land O’Lakes

$1.4B Credit Facilities
Administrative Agent & Joint Bookrunner



$1.0B Credit Facility
Administrative Agent, Sole Bookrunner & Joint Lead Arranger


Broadband buildout: first mover advantage

As the availability of broadband continues to expand in rural communities, the advantages of being a first mover—the first to bring a robust broadband offering via fiber to the premise infrastructure into a particular market—are becoming ever clearer, according to Andy Smith, managing director, Communications division of CoBank.

“Broadband companies that are looking to expand into adjacent markets are approaching rural America with a greater sense of urgency because they’re seeing the advantages of being first in,” said Smith. “If you’re second into the market and you’re trying to overbuild an existing fiber network, for example, it’s a tough business model to make work.” 

Smith also said that many companies—both large and small telecommunications companies, incumbent local exchange carriers and companies overbuilding existing fiber to cable companies—have been applying for funding from the recent government programs helping support the rural buildout.

“The government funds are certainly helping,” Smith said. “But the grant funds are not guaranteed, and even if a company is awarded funds, it takes time—typically months or even up to two years—for the money to start flowing. Rather than obtaining partial government funding, these companies have seen a bigger advantage from being first in.

“Especially in rural areas where there is less density, having two fiber providers just doesn’t make sense.”

Smith noted that similar urgency has developed in underserved markets where the existing broadband technology—such as legacy DSL networks using copper wire—is substandard. 

Recent CoBank Capital Markets Activity

Cable One

Cable One

$850M Credit Facilities
Joint Lead Arranger

Charter Communications

Charter Communications

$750M Credit Facilities
Lead Arranger & Bookrunner

i3 Broadband

i3 Broadband

$270M Credit Facility
Administrative Agent & Lead Arranger

Power & Energy

BESS transactions gaining momentum in renewable energy banking market

With bank loan volume from traditional onshore wind and solar energy projects decreasing, renewable energy lenders are turning their attention to deals with battery energy storage system (BESS) components and stand-alone BESS projects.

BESS is a growing trend in renewable energy in which rechargeable batteries are used to store energy from intermittent renewable energy sources and dispatch the energy later when it is needed.

“In addition to new deal volume in traditional standalone onshore wind and solar transactions, CoBank is increasingly moving towards projects with BESS and even committing to appropriately structured standalone BESS transactions,” said Matt Hout, managing director, Capital Markets, with CoBank. “Traditional renewable energy sources, while cheaper, are inconsistent relative to traditional energy sources. 

“The advent of BESS helps to store that energy and dispatch it when load demand increases, giving consumers access to these cheaper sources of energy,” he continued.

Hout said that CoBank’s BESS activity has been growing rapidly over the past 18 months as the technology has developed and improved to a point at which traditional bank lenders are now comfortable financing these projects. He expects BESS lending activity to be a large part of CoBank’s project finance transaction volume through the remainder of 2023.

Recent CoBank Capital Markets Activity

Denton County Electric Cooperative (aka CoServ)

Denton County Electric Cooperative (aka CoServ)

$400M Credit Facilities
Administrative Agent & Lead Arranger

Lightsource Beacon III, LLC

Lightsource Beacon III, LLC

$130M Credit Facility
Administrative Agent

Tri-State Generation & Transmission Association

Tri-State Generation & Transmission Association

$150M Credit Facility
Administrative Agent

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