The Federal Reserve has raised interest rates for the first time in three years, and some hoteliers are worried about what that means for their ability to build hotels and grow their businesses.
The Federal Open Markets Committee voted unanimously today to raise the Federal Funds rate by 0.25 percentage points to a range of 3.75% to 4%. A majority of members put into their projections another rate increase before the end of the year.
In his opening statement at a news conference about the decision, Federal Reserve Chair Kevin Warsh said that while uncertainty remains elevated in part to “geopolitical developments,” domestic spending has been resilient, productivity growth is strong and capital investment is robust. Job gains are keeping pace with the workforce, and the unemployment rate hasn’t changed much.
“But inflation remains elevated,” he said, referring to the latest report that U.S. inflation remained at 3.4% on an annual basis in August. “Today’s policy action will support a timelier return to the committee’s 2% goal. This committee will deliver price stability.”
In a statement, Asian American Hotel Owners Association President and CEO Laura Lee Blake said higher interest rates don’t just raise the cost of borrowing.
“They raise the cost of growth,” she said. “For hotel owners, today’s Federal Reserve rate increase can affect everything from acquisitions and refinancing to renovations and reinvestment in their properties.”
Hoteliers respond
AAHOA leaders and members are in Washington, D.C., this week for their National Leadership & Advocacy Conference, and access to capital is one of the group's top priorities, Blake said. The proposed STRONG Act would raise the maximum Small Business Administration 7(a) and 504 loan amounts from $5 million to $10 million. That change would give hotel owners greater access to the capital to invest, grow, create jobs and remain competitive.
“As the cost of capital rises, access to capital matters more than ever,” Blake said. “America’s small-business owners should not have to put growth on hold simply because the financing tools available to them have not kept pace with today’s economy.”
There’s a lot of good real estate out there that works, and the financing needs to reset for today’s market, said Greg Friedman, managing principal and CEO of Peachtree Group, via email.
“I think raising rates is the right move for the Fed right now,” he said. “Paradoxically, that could actually help bring long-term rates down by showing the bond market the Fed is serious about inflation.”
That matters more for commercial real estate than many realize because the 10-year Treasury yield has a much greater influence on the cost of long-term capital and underlying real estate values than the federal funds rate, Friedman said.
“Greater certainty around the cost of capital would be constructive for the sector,” he said. “We’re not going back to the ultra-low rates of the past, so the market needs to build capital structures that work in a sustainable rate environment.”
Additional Fed comments
In his initial comments, Warsh said the FOMC’s decision comes at a time when the American economy appears to be strengthening, pointing to new hiring, private-sector earnings and business capital investment. Credit flows, particularly for businesses, have been “robust,” he added.
Echoing his comments made at a policy symposium in Jackson Hole in August, Warsh said he would be hard-pressed to describe the broad financial conditions as restrictive.
“The view was widely shared by the committee, so we removed a dose of accommodation,” he said.
The geopolitical landscape of shocks and uncertainty allows one to appreciate the resilience of the economy, Warsh said. The jobless rate remains low at about 4.1%, and both job openings and weekly hours have been increasing. Unemployment claims on a four-week moving average are at levels consistent with full employment.
For more than five years, however, inflation has been running above the Fed’s target, he said.
“Our predominant focus is on the price-stability side of our mandate,” he said. “The plain fact is that inflation is too high and has been for too long.”
The inflation readings over the summer don’t show the underlying trends have meaningfully improved, Warsh said. The most recent readings show the 12-month change in total Personal Consumption Expenditure Price Index was around 3.6% in August. Core CPE and Consumer Price Index prices are running at about 3.2% and 2.4%, respectively.
“Too many categories are still posting increases above 3%, on both a 6- and 12-month basis,” he said.
When asked by a reporter about the effectiveness of small rate hikes when they do not address the energy supply side of inflationary pressures, Warsh said the FOMC can’t affect any individual prices, including oil or food at the grocery store.
“What we can do and will do is ensure that any change in relative prices don’t broaden out, don’t have second- and third-order effects on the economy,” he said.