‘This economy is not your grandmother’s economy.’
According to Barry Sternlicht, the chairman and chief executive of Starwood Property Trust, the Federal Reserve lacks the necessary “tool kit” to effectively control inflation by raising interest rates in the current economic climate.
During Starwood’s first-quarter earnings call, Sternlicht expressed the need for caution, highlighting the flaws in the tools at hand. He also urged Fed Chair Jerome Powell to consider cutting rates before the upcoming election in November.
According to him, the economy is not performing as anticipated, contrary to expectations. And it’s incredibly straightforward, which is why Americans have jobs – their balance sheets have been repaired. They offer fixed-rate mortgages. They have a staggering $235 billion in interest income from their cash, which is currently parked in money-market accounts and earning an impressive 5%.
Signs of strain have emerged in consumer credit as a result of the Federal Reserve’s recent series of forceful interest rate increases. According to Sternlicht, the federal government has been hit hard by higher interest rates, with its interest expenses skyrocketing to $1 trillion, almost double the amount in 2020.
According to Sternlicht, rate hikes have caused significant disruptions to the valuations of commercial assets both domestically and internationally, which has had a negative impact on regional banks.
According to him, spillover is not only something that academics study. Because cities and municipalities rely on the real-estate taxes generated by these commercial assets to fund essential services such as schools, police, and waste management, among others.
On a more positive note, Sternlicht highlighted the advancements in technology, specifically mentioning recent announcements by Meta Platforms Inc. and Microsoft Corp. regarding the development of data centres. This is an area where Starwood has been highly involved.
Starwood’s shares experienced a 2.7% increase on Wednesday, outperforming the Dow Jones Industrial Average DJIA, which saw a 0.4% gain. This further extends the Dow’s longest winning streak of the year. The S&P 500 index closed without any change, while the Nasdaq Composite Index experienced a slight decline of 0.2%, as reported by FactSet.