The Federal Reserve’s decision to lower its interest rate by 50 basis points came as surprisingly aggressive but still welcome news to U.S. hoteliers.
When announcing the cut, the Fed’s Federal Open Market Committee said in a statement that recent indicators suggest economic activity continued to expand at a solid pace. Job gains have slowed, and while the unemployment rate has increased, it’s still low. Inflation has slowed, moving closer to the committee’s 2% target. The cut takes the federal funds rate down to 4.75% to 5%.
C. Patrick Scholes, managing director of lodging and leisure equity research at Truist Securities, said lower interest rates are a broad positive for the lodging and ownership sectors.
“For hotel real estate investment trusts, [it will mean] a higher likelihood of increased transaction activity,” he said via email. “For the C-Corps, a tailwind to unit development, and, for vacation ownership companies, better net returns on their securitizations.”
The Fed started a series of 11 increases between March 2022 and July 2023 to cool a hot jobs market and slow the growth of inflation to its target of about 2%. The rate increases ranged from 25 to 75 basis points at a time, increasing the federal funds rate from a range of 0.25% to 0.5% up to 5.25% to 5.5%.
During the pandemic, the Fed drastically cut interest rates to stimulate the economy.
The Fed’s goal now is to maintain a healthy rate of inflation and avoid a surge in joblessness as well a recession caused, at least in part, by its prior rate increases. It had indicated earlier this year it planned to lower rates, and market predictions of cuts started as early as March. But the lack of cuts at that point led to disappointment as the Fed deemed inflationary pressures too strong to cut that early.
Industry reactions
The Fed's move for a 50-basis-point cut instead of 25 is an indication that it’s moving with conviction and willing to make decisions based on the data available, said Adi Bhoopathy, managing principal and head of capital markets for Noble Investment Group. The initial cut won’t have an immediate impact as it usually takes a quarter or two to settle in.
All of the prognostications are already looking at the forward curve with meaningful rate cuts throughout the next year and a half, he said. Lenders in general are already taking a positive view, and folks who were sitting on the sidelines are already picking up the phone and making proactive calls.
In terms of hotel deals, those on the sell side are looking positively at a timeline that’s likely more near-term than previously anticipated, starting as soon as the beginning of the new year, he said. The start of the year is when there should be meaningful evidence of activity starting to take place.
Looking at its own investment pipeline, what it's underwriting today and talks with lenders, Noble expects 2025 to be a “very active year” for transactions, Bhoopathy said. It will take time for buyers to actually secure that lending with the lower rates, so more movement will likely take place in the latter half of the year, but the deals process takes time anyway.
“We feel like it’s going to be robust activity, and definitely more in the second half onward,” he said.
As far as new development goes, Bhoopathy said that while the lowering cost of debt is a factor, the main thing will still be the equity requirements from lenders. Availability of financing is the biggest driver of new development, and the restrictions and bank regulations will continue to be an obstacle.
New supply will start showing from high-quality sponsors early on, but the general marketplace will be a laggard, he said. Most markets have recovered, but not everywhere. Not every market needs more supply than what’s currently in place, he added.
Plato Ghinos, president of Shaner Hotel Group, said he’s watching to see whether this rate decrease will boost consumer confidence.
“I think that’s the most important part of the news today because we see a slowdown of the consumer on their spending, including leisure,” he said.
Guests are shopping more based on rates, so average daily rate increases have been leveling off, he said. On a national scale, ADR is moving much more slowly because the consumer is getting squeezed.
“That’s my biggest concern, and hopefully this rate cut will boost our consumer confidence to keep on traveling, especially in the first quarter in the south and southwest,” he said. “I see that more as a relief.”
In a statement, Miraj Patel, chairman of the Asian American Hotel Owners Association, said lower borrowing costs could help ease some of the financial pressures on small business owners, allowing them to reinvest in their properties, retain employees and ensure high-quality guest experiences.
"This cut is an important step toward providing economic relief and stability," he said. "For many in the hospitality industry, this move comes at a critical time, as hotel owners continue to navigate the challenges posed by rising costs and a fluctuating market. We hope this decision will create more favorable conditions for growth and investment within the hospitality sector."
Comments from the Fed
In a news conference explaining the rate cut, Fed Chairman Jerome Powell said the U.S. economy is strong overall, and the Fed has made significant progress toward its goals. Inflation has eased from a peak of 7% to an estimated 2.2% as of August, and the Fed remains committed to returning to its 2% target. Gross domestic product rose to an annual rate of 2.2% in the first half of the year, and available data show a similar pace of growth for this quarter.
In the labor market, conditions have continued to cool, he said. Payroll job gains averaged 116,000 per month over the past three months, a step down from the pace seen earlier in the year. The unemployment rate has moved up, but it remains low at 4.2%. Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed.
“Overall, a broad set of indicators suggest that conditions in the labor market are now less tight than just before the pandemic in 2019,” he said. “The labor market is not a source of elevated inflationary pressures.”
Restricted monetary policy has helped restore the balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remain well anchored, Powell said.
“As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased,” he said. “We now see the risks to achieving our employment and inflation goals as roughly in balance, and we are attentive to the risks to both sides of our dual mandate.”
Powell noted that its not on any preset course and will continue to make rate decisions meeting by meeting as moving too quickly could risk undoing its progress on inflation while moving too slowly could weaken economic activity and employment.
The members of the committee wrote their individual assessments of an appropriate path for the federal funds rate based on they considered to be the most likely scenario going forward.
“If the economy evolves as expected, the median participant projects that the appropriate level of the federal funds rate will be 4.4% at the end of this year and 3.4% at the end of 2025,” he said.
Editor's note, Sept. 19, 2024: This story was updated to include a statement from AAHOA Chairman Miraj Patel.