Federal Reserve rate cuts keep fading further into the future. The culprits include stronger-than-expected inflation and a still-robust job market.
The latest inflation reading climbed to 3.5%, well above the Fed’s 2% target. And unemployment remains well below 4%.
Investors, economists, and lenders had been expecting the Fed to begin its benchmark federal funds rate off its current target of 5.25% to 5.5%, the highest level in decades. But a resilient U.S. economy continues to delay that path.
In one recent reflection of the new reality, Chicago Federal Reserve Bank President Austan Goolsbee recently told reporters that the Federal Open Markets Committee seems likely to hold firm on rates.
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“Given the strength of the labor market and progress on easing inflation seen over a longer arc, I believe the Fed’s current restrictive monetary policy is appropriate,” Goolsbee said in late April, addressing the Society for Advancing Business Writing and Editing.
Back in 2023, everyone was sure the U.S. economy would fall into recession. After all, inflation had hit 9% in 2022, and the Fed was aggressively raising rates in an attempt to hit its inflation target of 2%. While slashing inflation from 9% to 4% didn’t prove so difficult, getting all the way to 2% has been a challenge.
“The U.S. economy made substantial progress in 2023 on the Federal Reserve’s dual mandate of maximizing employment and stabilizing prices. Inflation had one of the largest drops in the last 50 years and did so with solid growth, low unemployment, and no recession,” Goolsbee said.
Another signal comes from interest-rate futures markets. At the beginning of 2024, the conventional wisdom called for six cuts. Now, the prevailing number is zero to one cut.
For Wolfgramm Capital, the rate plateau is a good news/bad news scenario. On the one hand, lower costs of capital would ease our borrowing costs. However, there’s also the reality that a growing economy drives occupancy in the hotel properties in our portfolio.
While the economy remains at full employment, 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 and a robust economy has buoyed our luxury properties.
Our geographic advantage
Our ground up developments 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.
According to a report by the Federal Reserve Bank of Dallas, recently released data show the Lone Star State has long been a leader for business relocations. More than 25,000 establishments relocated to Texas from other states from 2010–19, bringing more than 281,000 jobs. At the same time, just over 18,000 establishments left the state, costing about 179,000 jobs. The result: a net migration of 7,232 firms and an addition of nearly 103,000 jobs.
While data covering the pandemic era and beyond are incomplete, other evidence suggests Texas remains a go-to spot. For instance, Texas’ rate of job growth was 2.0% from March 2023 to December 2024, according to the U.S. Labor Department, one of the highest growth rates 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.
Despite Fed Chairman Powell’s latest decision to leave interest rates unchanged due to a ‘lack of further progress’ on inflation, here are Wolfgramm Capital maintain a long-term view with all of our investments. This insulates us from the volatility the stock market can otherwise impose, even on real estate market characteristics and we remain bullish on the opportunities across all the assets we are currently developing and operating.
