The Federal Open Market Committee voted 9 to 3 to lower the federal funds rate by 25 basis points to a range of 3.5% to 3.75%.
This is the third interest rate cut of the year, with the first coming in September and the second in October, for a combined 75 basis points in reductions in 2025. The Fed has signaled fewer cuts in the coming years, with its median projection suggesting one quarter-point percentage cut in 2026 and another in 2027.
In his remarks at a news conference, Federal Reserve Chair Jerome Powell said that in the near term, risks to inflation are tilted to the upside while risks to employment are to the downside.
“There is no risk-free path for policy as we navigate this tension between our employment and inflation goals,” he said. “A reasonable base case is that the effects of tariffs on inflation will be relatively short-lived — effectively a one-time shift in the price level. Our obligation is to make sure that a one-time increase in the price level does not become an ongoing inflation problem. But with downside risks to employment having risen in recent months, the balance of risks has shifted.”
Industry reaction
The Fed’s rate cut wasn’t unexpected, but the board members did not appear unified in their interpretation of the latest government and private sector data, said Jan Freitag, national director of hospitality analytics at CoStar. With that in mind, the interest rate under Powell’s leadership of the Fed will likely stay in place.
The rate cuts should give some relief to borrowers who rely on the long-term interest rate when refinancing existing or construction loans, he said.
“The combination of this lower interest rate and the compression of the bid-ask spread could signal that brokers will finally be correct with their annual announcements that ‘next year, transaction volume will be better,’” he said.
The commercial mortgage backed securities market for hotels has been active this year, he added. Many large asset holders have already brought debt to market to refinance their hotels and take some money off the table. The lower interest rate will likely continue to support this trend.
The third rate cut this year is a positive signal for hotel owners, said Kamalesh Patel, chairman of the Asian American Hotel Owners Association, via email.
“Lower borrowing costs help with everything from renovations to seasonal staffing,” he said. “It’s a timely boost and a great gift for the industry heading into the new year.”
Nearly $900 billion in economic activity depends on franchised and independent hotels, so stability in interest rates is not just welcome, it’s exigent, AAHOA President and CEO Laura Lee Blake said.
“The Fed’s third cut will provide crucial breathing room for small business owners navigating ongoing economic uncertainty,” she said.
The additional quarter-point cut reinforces its view that inflation is continuing to move in the right direction and that policy can ease at a measured pace, said Adi Boopathy, managing principal and head of capital markets at Noble Investment Group, via email. A single cut won’t shift conditions overnight, but it adds clarity to the forward path and supports the constructive sentiment seen from lenders in recent months.
“As financing markets continue to stabilize, we expect transaction activity to build through the year, particularly as buyers and sellers gain more confidence around the cost of capital,” he said. “Lower borrowing costs help, but availability of credit and equity requirements remain the real constraints on new development, so supply growth will continue to be muted.”
Powell’s remarks
While some key government data has not yet been released, the available indicators suggest that economic activity has been expanding at a moderate pace, Powell said. Consumer spending appears to have remained solid, and business fixed investment has continued to expand. The housing sector, however, remains weak.
“The temporary shutdown of the federal government has likely weighed on economic activity in the current quarter, but these effects should be mostly offset by higher growth next quarter, reflecting the reopening,” he said.
Though employment data for October and November are delayed, the evidence available suggests both layoffs and hiring remain low, he said. The September labor market report showed the unemployment rate edged up to 4.4% while job gains have slowed significantly since earlier in the year.
“A good part of the slowing likely 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,” he said. “In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen in recent months.”
Inflation has eased significantly from its highs in mid-2022, but it remains elevated compared to the long-term goal of 2%, Powell said. There’s little new data released on inflation since the last FOMC meeting in October. Total price consumer index prices increased 2.8% over the 12 months ending in September, and when excluding volatile food and energy categories, core PCE prices also rose 2.8%.
“These readings are higher than earlier in the year as inflation for goods has picked up, reflecting the effects of tariffs,” he said. “In contrast, disinflation appears to be continuing for services. Near-term measures of inflation expectations have declined from their peaks earlier in the year, as reflected in both market- and survey-based measures.”
Most measures of longer-term expectations remain consistent with the Fed’s 2% inflation goal, he said. The median projection in the summary of economic projections for total PCE inflation is 2.9% this year and 2.4% next year, slightly lower than the median projection in September. As a result, the median falls to 2%.