From the Desk

The U.S. Federal Reserve moved as expected and hiked rates this week. The Federal Open Market Committee’s decision was unanimous. And indications from the committee’s Summary of Economic Projections suggest there is more to come. For its part, markets expect three more hikes within the next year. Fed Chairman Kevin Warsh was succinct in his update. He repeated that the Fed’s objective is to hit its inflation target. He is concerned about the breadth of inflation. And he made it clear that current rates are not restrictive. Warsh was upbeat on economic growth and pointed to the resilience of the consumer and companies, even as geopolitical headwinds continue to run high.

Warsh characterized this rate hike as removing “a dose of accommodation.” This leads to the conclusion that more hikes would be needed to help tame inflation and, by extension, the economy. But cooling the economy means cooling the AI buildout, which could derail America’s race to lead it.

Nevertheless, any transition to higher rates works best if done gradually rather than arriving as abrupt shocks. Cooling growth is never easy. Cooling innovation is harder still. Warsh has been dealt a tough hand. He has stated and restated the need for the Fed to stay in its lane and protect its independence. That clarity is welcome, as any policy execution inevitably hits speed bumps.

Sources: Bloomberg, The Financial Times, 2026.

The credit market regime is changing. For much of this decade, investors benefited from beta, spread compression and broad market strength. This phase may be giving way to a more selective environment in which issuer quality, sector exposure and structure matter more.

Importantly, leveraged loans and collateralized loan obligations (CLOs) continue to show notable resilience. CLO portfolio defaults just hit their lowest level in four years according to Deutsche Bank, with cumulative defaults across U.S. CLOs totaling $9.1 billion so far this year, well below the $26.8 billion full-year total in 2025. That suggests the backdrop for leveraged loan borrowers remains constructive, supported by generally healthy consumer spending and corporate balance sheets.

Still, there are signs of dispersion beneath the surface. The share of loans priced below 90 remains elevated at 11.2%, up from 8% a year ago, according to the Morningstar LSTA US Leveraged Loan Index. In my view, the balance of risks has shifted from micro to macro. With inflation still above target and rates moving higher, monetary tightening is becoming the dominant concern for credit markets. That is where the floating-rate profile of leveraged loans can matter. Carry may continue to absorb modest spread widening, while higher base rates can support income for investors. In my view, the market is not necessarily weaker – it is becoming more discriminating.

Sources: Deutsche Bank, Morningstar, 2026.

During the Canada Investment Summit this week, a large telecom announced plans to quadruple data center capacity in Saskatchewan, with projected investment exceeding C$50 billion. The headline investment figure includes not only construction, but also tenant computing equipment and associated power infrastructure.

This was the first major data center announcement since the federal government released its “Responsible Data Centre Development Principles” two weeks ago. These were, in part, a response to growing public concerns. The voluntary principles include minimizing impacts on electricity systems, prioritizing low-emission energy and reducing water use.

While federal politicians may talk about wanting clean power for data centers – reflecting the growing BYONCE (bring your own new clean energy) movement in some U.S. states – the reality on the ground may be different. In our view, the federal principles are unlikely to have much impact as electricity and water are primarily provincial jurisdiction.

Some politicians promoting data center investment emphasize Canada's ample clean energy, but energy sources vary significantly by province. The source of electricity, its carbon intensity and the availability of grid capacity in provinces such as B.C. and Quebec are very different from Alberta and Saskatchewan. While many large data center proponents are proposing closed-loop cooling systems to minimize on-site water use, the source of power, and how that power is generated and cooled, can materially increase a project's overall water footprint.

Many Canadian institutional investors are looking to increase domestic investments in the current political context, and data centers present multiple tradeoffs. The Saskatchewan project is Canadian owned and supports data sovereignty, reflecting growing concern about dependence on foreign AI infrastructure. However, we believe that provincial responsibility for electricity and water will result in vastly different sustainability risks for data centers across Canada.

Sources: The Globe and Mail, Government of Canada, The New York Times, 2026.