Investors everywhere are asking the same question: When will the Federal Reserve finally lower rates? The consensus keeps moving that date back – perhaps to November 2024, maybe to next year.
With all eyes on Fed policy and on inflation, Federal Reserve Bank of New York President John Williams took the stage at the Economic Club of New York on May 30 to offer a glimpse of the central bank’s outlook. Williams reported that he believes inflation will continue to decline in the second half of 2024.
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Williams acknowledged that inflation remains well above the Fed’s stated goal of 2%, and he said elevated borrowing costs have acted as a drag on economic growth. Even so, Williams said in prepared remarks that the Fed is successfully guiding the post-pandemic economy.
“With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year,” Williams said in prepared remarks.
Williams said a rate increase is unlikely, and he didn’t offer much in the way of guidance about how the Fed will proceed at its mid-June meeting. In a panel discussion following his remarks, Williams said he couldn’t say when he might support a rate cut. That call, he said, depends on what the economic data shows.
“I don’t feel any urgency or need that we have to make a decision now,” he said.
Data out in late May reflected a slowing economy, one that grew at a slower pace in the first quarter than initially reported. The downward revision underscored a loss of momentum at the start of the year.
In a separate indication of thinking inside the Fed, Minneapolis Federal Reserve President Neel Kashkari told CNBC in late May that rate hikes look unlikely. Asked what conditions were needed for the Fed to cut rates once or twice this year, Kashkari said: “Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back.”
“Higher for longer” has become the mantra as inflation proves more stubborn than expected. For nearly a year, central bankers have maintained their benchmark rate in a target range of 5.25% to 5.5%. Fed policymakers will meet next on June 11-12.
For Wolfgramm Capital, the ongoing uncertainty around rates is just one more challenge to deal with. A Fed rate cut would reduce the cost of capital and therefore reduce 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 has buoyed our luxury properties.
