With the Federal Reserve’s decision to hold interest rates steady, hotel owners in the U.S. say this will prolong increased cost pressures.
The Federal Open Markets Committee voted 11-1 to hold the federal funds rate at 3.5% to 3.75%. In his opening remarks, Fed Chair Jerome Powell cited an expanding economy with low unemployment alongside somewhat elevated rates of inflation as reasons to keep rates the same.
“We see the current stance of monetary policy as appropriate to promote progress toward our maximum employment and 2% inflation goals,” he said. “The implications of developments in the Middle East for the U.S. economy are uncertain. We will remain attentive to risks to both sides of our dual mandate.”
The FOMC voted to hold rates steady at its January meeting as well after lowering rates three times in late 2025 for a total of 75 basis points.
Industry response
The Fed approving a 25-basis-point rate cut would not have materially affected owners’ bottom lines but it would have a larger psychological impact, said Joseph Yi, chief investment officer at Palette Hotels via email. Holding rates steady will likely slow the broader recovery in real estate, including lodging.
“The most significant effect will be on the buy side for two reasons: Elevated rates continue to make acquisition underwriting challenging, keeping the bid-ask spread wide, and the shift by large asset allocators from private credit back to equity will be delayed, further weighing on the investment sales market,” he said.
Markets were pricing in multiple Fed rate cuts at the beginning of the year, said Greg Friedman, president and CEO of Peachtree Group, via email. That outlook has shifted as rising energy prices, driven by geopolitical conflict, have renewed inflation fears.
“Those higher energy costs flow through the broader economy, increasing operating expenses and compressing corporate margins,” he said.
In commercial real estate, demand remains sound, but financial pressures are building, he said. Energy prices, high interest rates and geopolitical uncertainty are increasing the cost of capital and tightening financing conditions.
“While assets are performing, owners are now feeling the toll of sustained higher interest rates on their balance sheets,” he said. “We expect continued pressure on commercial real estate owners as more than $1 trillion of loans mature over the next 12 to 18 months, creating both challenges and opportunities across the credit and equity landscape.”
Holding steady on rates will have a neutral effect on the hotel transaction market, said Mike Cahill, CEO and founder of brokerage firm Hospitality Real Estate Counselors, by email.
“The market will still improve roughly 20% this year, driven by availability of equity and debt with current pricing already baked into valuations,” he said.
Powell’s comments
Available indicators suggest that economic activity has been expanding at a solid pace, Powell said during the news conference. Consumer spending has been resilient, and business fixed investment has continued to expand. At the same time, housing sector activity has remained weak.
The FOMC’s Summary of Economic Projections states the median participant projects that real gross domestic product will rise 2.4% this year and 2.3% next year, he said, noting this is stronger than projected in December. The unemployment rate was 4.4% in February and has changed little since late last summer.
“Job gains have remained low,” he said. “A good part of the slowing in the pace of job growth over the past year reflects a decline in the growth of the labor force, due to lower immigration and labor force participation, though labor demand has clearly softened as well.”
The median projection in the SEP is an unemployment rate of 4.4% at the end of the year that edges down afterward, he said.
Inflation has eased significantly from its highs in mid-2022, but it remains somewhat elevated relative to the Fed’s 2% longer-run goal, Powell said. Estimates based on the Consumer Price Index and other data indicate that total Personal Consumption Expenditure prices rose 2.8% over the 12 months ending in February. Excluding the volatile food and energy categories, core PCE prices rose 3 percent.
“These elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs,” he said. “Near-term measures of inflation expectations have risen in recent weeks, likely reflecting the substantial rise in oil prices caused by supply disruptions in the Middle East.”
Most measures of longer-term expectations remain consistent with the Fed’s 2% inflation goal, he said. The median projection in the SEP for total PCE inflation in 2026 is 2.7% and 2.2% in 2027, coming in a bit higher than projected in December.
The Fed lowered its policy rate by a total of 75 basis points in late 2025, bringing it within a range of plausible estimates of neutral, Powell said. That normalization should continue to help stabilize the labor market while allowing inflation to continue coming down. The implications of the war in the Middle East for the U.S. economy are uncertain, however.
“In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” he said.
Members of the FOMC shared their individual assessments of an appropriate path of the federal funds rate in the SEP, he said. The median participant projects the federal funds rate will be 3.4% at the end of this year and 3.1% at the end of 2027, unchanged from the December projection.