As everyone knows by now, U.S. Federal Reserve officials decided to leave interest rates unchanged at 5.3% at their meeting earlier this week. That should be good news, as holding rates steady would typically be seen as a sign of stability.
Instead, many people see it as the lack of progress in the fight against inflation and the hopeful decrease in interest rates.
The Fed said back in March it was considering cutting interest rates up to three times this year, and that's all anyone could talk about. Sure, there were definitely skeptics who doubted both the amount and whether the cuts would happen at all. Still, others saw this as a light at the end of the higher-interest-rate tunnel.
But now we're in June, when many hopefuls had expected at least one rate cut to have happened. Now the forecast is that the Fed will cut rates once by the end of the year.
Honestly, it would have been better to have held those potential rate cuts closer to the chest and waited to see how inflation behaved with interest rates held steady over several months.
The good news is that the interest rate increases that started in early 2022 and ended in July 2023 played their part well, and inflation slowed dramatically. That slowing pace stalled, however, after the Fed talked about potential rate cuts.
Now, I'm not an economist, so I can't say whether this correlation equals causation. Regardless, it gave a sense of false hope to businesses who were counting on rate cuts.
On one hand, you could argue all businesses should have taken the skeptic route and acted as if those rate cuts weren't coming and just gotten used to the current rate.
On the other hand, of course businesses are going to want to see if interest rates go down because that will cut down on their cost of capital.
We've heard a lot of talk in recent months about normalization in the hotel industry, particularly around guest behavior and average daily rates. We're also starting to see normalization of the cost of capital, in that owners and developers are now getting used to interest rates being where they are. Interest rates are definitely higher than where they've been in recent years, but they're within pre-Great Recession rate ranges and nowhere near historical highs.
If you want, look at higher borrowing costs through the lens of the stages of grief: The industry could have reached the acceptance stage much faster if it didn't have this dangling carrot of rate cuts that was constantly out of reach.
Higher rates aren't necessarily a bad thing. Yes, the increases came quickly and would-be borrowers had little time to adjust to the last increase before the next one hit. But that strategy — hopefully — is a one-time thing. We have stability in rates now, and sure, a cut or two could ease the cost of borrowing, but we should get used to being in an environment when borrowing costs aren't so close to zero.
You can reach me at bwroten@hotelnewsnow.com as well as LinkedIn.
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