U.S. hotel owners hoping for lowered cost of debt to appear on the horizon will have to wait even longer.
The Federal Open Markets Committee voted unanimously to hold the federal funds rate at 3.5% to 3.75%. In his first remarks as the new Federal Reserve chair, Kevin Warsh said that economic activity is expanding at a solid pace despite the elevated uncertainty due in part to the war with Iran. Productivity growth and capital investment are both strong, and U.S. job gains have kept pace with the workforce while the unemployment rate has changed little.
“We recognize that inflation has been running well ahead of the Fed’s long-stated inflation goal of 2%,” he said. “That’s been going on for more than five years. Persistently high prices are a burden for the American people, but the recent past need not be prologue."
The members of the FOMC are unambiguous and unanimous in their goal, Warsh said.
“This committee will deliver price stability,” he said.
Along with the announcement of the federal funds rate, the FOMC released its summary of economic projections, though Warsh declined to include his own. The median projections call for real gross domestic product to rise 2.2% this year and 2.3% next year. Total price consumer expenditure inflation will run at 3.6% this year and 2.3% in 2027. The unemployment rate will stand at about 4.3%.
“The median participant judges the appropriate federal funds rate to be at 3.8% at the end of this year and 3.6% at the end of next,” Warsh said.
The FOMC voted to hold rates steady in March and January after lowering them three times toward the end of 2025 for a total of 75 basis points.
The cost of debt
The Federal Reserve’s decision to hold rates steady means hotel owners will continue operating in a high-cost lending environment, Rahul Patel, chairman of the Asian American Hotel Owners Association said in a statement. AAHOA members understand the need for economic stability, but they also know elevated interest rates make it harder to refinance debt, renovate their hotels and plan for future growth.
Patel said he encourages Warsh to take a balanced approach to keep inflation in check while recognizing the challenges that small business owners face.
“The longer borrowing costs remain high, the longer growth stays out of reach for hotel owners who are ready to reinvest in their properties and the communities they serve,” he said.
AAHOA has nearly 20,000 members who own more than half of all hotels in the U.S., Patel said. Many are small business owners who depend on access to capital to renovate properties, expand their companies and create local jobs.
“As the Fed signals that additional rate increases may still be ahead, we urge policymakers to weigh the cumulative toll that sustained high borrowing costs take on small businesses in capital-intensive industries like ours,” he said.
The Fed’s latest decision reinforces a reality that markets are finally starting to accept, said Greg Friedman, managing principal and CEO of Peachtree Group, via email. Policy rates may stay restrictive for longer than many investors hoped. Lower energy prices can help headline inflation, but the Fed is focused on the broader inflation backdrop, so it’s unlikely to move faster on lowering rates until it sees sustained progress.
“Rather than focusing on the timing of the next rate cut, investors should focus on building portfolios and investment strategies that can perform under current conditions,” Friedman said. “The winners in commercial real estate this cycle will be those who adapt to today's market realities, not those waiting for yesterday's conditions to return.”
A fourth consecutive hold, paired with a signal that a 25-basis-point increase is on the table later this year, tells investors that the elevated-rate regime isn't going away soon, said Joseph Yi, chief investment officer at Palette Hotels via email.
"When rates sit above recent historical norms, deals are harder to underwrite, and the transaction market stays tight," he said.
What goes underappreciated is the divergence between capital sources, he said. Equity is extraordinarily disciplined right now, but the debt markets are fiercely competitive, with private credit stepping in at elevated participation. The interest rate is still elevated but with more competition, more lenders and traditional lenders are willing to provide higher leverage without expanding rate.
"Capital is available — it's the equity, not the financing, that's the gating factor today," he said.
Fed comments
During his opening statement, Warsh also announced the creation of five taskforces to focus on separate areas of monetary policy. They will tackle Fed communications, balance sheet policy, the use and reliance on existing data sources, productivity and jobs in an era of transformation and the Fed’s inflation frameworks.
When asked whether the taskforce on inflation framework would include a review of the Fed’s 2% inflation target, Warsh said that 2% has been the Fed’s long-standing objective.
“You've heard me say before, I tend to focus on the left of the decimal point,” he said. “Well, the two is the left of the decimal point. For now, zero is to the right. I see no reason until we have reestablished our commitment and ability to deliver on the 2% inflation objective to revisit that, so that will be outside the scope of what we're taking on.”
The FOMC has dropped its forward guidance because members agreed it “was not well-suited to the current policy conjuncture,” Warsh said in his statement.
In response to questions, Warsh said the FOMC made the decision because some committee members felt providing it at this time doesn’t feel right. Others think that as a general proposition, that isn’t the role the FOMC should be in. Either way, that is something the taskforce on communications will address.
When asked on his views of inflation in the long term, the current drivers and whether he has any concerns about underlying inflation pressures, Warsh said the committee provided the best answer.
“Inflation remains elevated relative to the committee's 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy,” he said. “The paragraph goes on to say, but to be clear, the Fed will deliver price stability.
“My own judgment is the committee spent quite a bit of time, not just in two days, but over iterations of a couple of weeks. That's what we're prepared to say about inflation, but the commitment to deliver is strong, unanimous, and unambiguous, and that's, I think, an important message we've missed for five years, and we fix that.”