The Federal Open Market Committee’s decision to hold interest rates steady and lower its gross domestic product projections for 2025 signal a bumpier road ahead than many hoped.
In a news conference yesterday, Federal Reserve Chairman Jerome Powell said inflation has come down significantly over the past two years, but it still remains elevated relative to the 2% longer-run goal. Estimates based on the consumer price index and other data indicate that total personal consumption expenditure prices rose 2.5% year over year in February.
The FOMC voted to hold the federal funds rate at 4.25% to 4.5%. In its quarterly economic projection, the committee lowered its full-year 2025 GDP growth expectation to 1.7%, down from the 2.1% it forecast in December. The current unemployment rate is 4.1%, and the committee expects the median rate to be 4.4% at the end of the year.
Some near-term measures of inflation expectations have also recently moved up, in both market- and survey-based measures, Powell said. Consumers and businesses responding to these surveys cited tariffs as a driving factor.
The president’s administration is implementing significant policy changes in trade, immigration, fiscal policy and regulation, he said.
“It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy,” he said. “While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high.”
The FOMC cut rates twice in 2024, the first time by 50 basis points in September and then by another 25 basis points in December.
Hotel industry perspective
Though the Federal Reserve's commitment to economic stability is appreciated, the decision to hold interest rates underscores the continued challenges hotel owners face nationwide, said Laura Lee Blake, president and CEO of the Asian American Hotel Owners Association, via email.
“With rising costs and ongoing market uncertainty, access to capital remains a critical issue for our industry," she said. "We urge policymakers to consider long-term strategies that foster economic growth, financial stability and greater opportunities for hotel owners. AAHOA remains dedicated to advocating for policies, such as the [Loans in Our Neighborhoods] Act, that support the resilience and success of our members.”
The Fed’s announcement of a declining GDP growth environment just puts numbers around the deteriorating sentiment that hoteliers are feeling right now, said Jan Freitag, national director for hospitality market analytics at CoStar, via email.
“Consumer conviction continues to take a hit, which will likely translate into slower spending on vacations and trips this summer,” he said.
The interest rate environment still isn’t conducive to dealmaking and new construction, he said.
“The good news is that supply growth will not really be a headwind for the foreseeable future,” he said. “On the deal front, though, the bid-ask spread will continue to be wide and the higher-for-longer-interest rate will not move many market participants from the sidelines.”
The Fed is in a tough spot in that there’s generally a desire to lower rates to help stimulate a slower economy, but inflation remains higher than desired, said Aran Ryan, director of industry studies at Tourism Economics.
“There could be reasons for raising rates to fight off inflation, but they can’t really do that without risking slowing the economy,” he said. “There’s certainly arguments that you would want to lower rates to try to stave off some of the things that are happening in terms of tariffs and so on that would slow growth, which you can’t do that without maybe unanchoring inflation expectations.”
The Fed is generally seeing a slowing of the economy, and they’re reacting accordingly, he said. If the committee hadn’t reduced its projections, it would look like they’re not in sync with what’s going on.
From a lodging perspective, the economy’s in good shape and isn’t in or near a recession, and that’s key for lodging demand growth in the U.S., he said.
“We're watching if consumers get more uncertain, maybe they pull back a bit,” he said.
Ryan said he’s also keeping an eye on business investment decisions.
“I think companies are taking a pause on some of those,” he said. “If they take a larger pause or a longer pause, that could feed into a greater growth slowdown, which would be concerning.”
Further remarks from the Fed
As part of their economic projections, members of the FOMC wrote their individual assessments of an appropriate path for the federal funds rate, Powell said. The median participant projects the appropriate level for the federal funds rate will be 3.9% at the end of 2025 and 3.4% at the end of 2026. This is the same projection as made in December.
“While these individual forecasts are always subject to uncertainty, as I noted, uncertainty today is unusually elevated,” he said. “And, of course, these projections are not a committee plan or a decision.”
As the economy evolves, the FOMC will adjust its policy stance to best promote maximum employment and price stability, he said. If the economy remains strong and inflation doesn’t move sustainably toward its 2% goal, the committee will maintain its policy restraint for longer. If the labor market weakens unexpectedly, it can ease policy accordingly.
When asked about growing concerns about the U.S. entering a recession, Powell said there’s always an unconditional possibility of a recession. Looking back through the years, there could be within 12 months a one-in-four chance of a recession.
As for whether the current situation has elevated possibilities for a recession, he said the FOMC doesn’t make such a forecast. Forecasts by outside organizations have raised the possibility of a recession, but they’re still at relatively moderate levels.
“If you go back two months, people were saying that the likelihood of a recession was extremely low, so it has moved up, but it’s not high,” he said.