February Outlook: Fed Puts Off Rate Cuts — Again

Investors keep expecting the Federal Reserve to cut its benchmark federal funds rate from its current target of 5.25% to 5.5%, the highest level in decades. And a resilient U.S. economy keeps sabotaging the script.


In the most recent example, the Federal Open Markets Committee announced Jan. 31 that it would again stand pat on rates. Fed Chairman Jerome Powell also hinted there might not be a cut coming at the Fed meeting in March. Equities, which had been soaring, reversed course on the news.


“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said. “But the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured.”

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A year ago, the consensus among economists and investors was that 2023 would be the year the U.S. economy fell into recession. The forecast made perfect sense: The federal government had pumped trillions into the economy in 2020 and 2021, and the Fed had slashed rates to zero. But as inflation hit 9%, the Fed raised rates aggressively. Unwinding pandemic-induced emergency measures surely would lead to an economic reversal, the conventional wisdom said.


Instead, the U.S. economy keeps defying expectations. Gross domestic product surged by a stronger-than-expected 3.3% in the fourth quarter of 2024. Inflation, which had fallen to 3.1% in November 2023, edged up to 3.4% in December. Labor markets remain robust, and stocks have been flirting with record highs.


“We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2%,” Powell said during his Jan. 31 news conference.


For Wolfgramm Capital, the Fed’s rate pause is a mixed bag. On the one hand, lower costs of capital would benefit us. However, there’s also the reality that a growing economy is good for the hotel properties and other commercial real estate assets in our portfolio.


As Powell noted, the unemployment rate is 3.7 percent, close to full employment. That sort of economic tailwind is good for hotel occupancy. And the post-pandemic “revenge travel” trend hasn’t hurt.


Meanwhile, the intense labor shortages of 2020 and 2021 -- shortages that made it difficult to operate hotels -- have eased. Strong job creation has been accompanied by a welcome increase in the supply of workers. The labor force participation rate has risen, and wage growth has eased.


Wolfgramm’s “barbell” approach to investment is well-suited to the current economy. At the lower end of the market, two years of inflation still sting consumers – and that makes our affordable properties well-positioned to meet demand from budget-minded travelers. And at the top of the market, the wealth effect from rising stock prices has buoyed our luxury properties.

Our geographic advantage

Our acquisitions are focused on the Sun Belt, with a special concentration in Texas. For decades, the Lone Star State has churned out nothing short of an economic miracle.


Texas’ rate of job growth was 2.7% from December 2022 to December 2023, according to the U.S. Labor Department, the highest growth rate among large states.


Drawn by the combination of a strong job market and reasonable taxes, new residents are flocking to Texas. According to the U.S. Census Bureau, Texas added the largest number of people from mid-2022 to mid-2023, expanding by more than 473,000. And Texas’ 1.6% growth rate was third in the nation, trailing only South Carolina and Florida.



While headwinds in the capital markets continue to slow down other investment firms, tailwinds in Texas and a dual approach to hospitality by catering to both ends of the economic spectrum, are helping to buoy Wolfgramm Capital into 2024. We remain acutely aware that the inflation battle is far from over and that there is likely going to be turbulence across the commercial real estate industry, particularly in the multifamily and office sectors that may have knock on effects to other asset classes.


Our conservative underwriting, however, accounts for any move the Fed might make as the year unfolds, while not taking for granted that the Texas economy will remain as strong as it has. In short, while we continue to hope for continued growth and macro-economic stimulus, we remain prepared for any circumstances, good or bad.