Powell must be very careful! Real estate mogul: Fed\’s toolbox is flawed

Real estate mogul and Starwood Capital Group CEO Barry Sternlicht, speaking about the Fed\’s inability to effectively control inflation in the current economy just by raising interest rates, said the Fed\’s toolbox not suitable

Real estate tycoon and Starwood Capital Group CEO Barry Sternlicht was talking about the Fed\’s inability to effectively control inflation in the current economy just by raising interest rates. He said the Fed\’s toolbox Not appropriate.
On Wednesday, Sternlicht said on Starwood Property Trust\’s first-quarter earnings call: Powell has to be very careful because his toolbox is flawed.
He also urged Powell to cut interest rates before the November U.S. election.
The U.S. economy didn\’t collapse as we expected. The reason is simple. Americans have jobs. Their balance sheets are fixed.
They have fixed-rate mortgages. They also have interest income on $235 billion in cash held in money market accounts with a yield of 5%.
However, after the Federal Reserve\’s most aggressive rate hikes since the 1980s, cracks began to appear in consumer credit.
But Sternlich believes the biggest casualty of rising interest rates is the federal government, whose interest payments have doubled since 2020 to about $1 trillion.
Sternlicht said regional banks were among the victims of other collateral damage, with interest rate hikes sending commercial real estate valuations across the country and around the world into disarray.
This spillover effect is not just a theoretical matter, he said, because cities and local governments rely on real estate taxes from these commercial properties to maintain schools, police, waste management and all the other services they provide to their communities.
Sternlicht offered an ominous prediction for the future of U.S. regional banks amid the looming commercial real estate liquidation. He believes regional and community banks, major lenders to real estate, may soon be saddled with high interest rates. and the impact of inflation.
\”You\’re going to see maybe two regional banks fail a week,\” Sternlicht said.
There are more than 4,000 regional and community banks in the United States. Many of them may not have enough cash flow to handle a significant loss on real estate debt.
The entire real estate industry is taking a hit. Commercial real estate in particular is experiencing rising vacancy rates due to the rise of remote and hybrid work models.
Sternlicht has been sounding the alarm for more than two years. He said in an interview in January that this was an existential crisis.
Earlier this year, he predicted $1 trillion in losses from office properties alone.
Sternlicht said: We could have dealt with this problem. But we couldn\’t have dealt with it so quickly.
That $1.9 trillion in real estate loans is a fragile existence now.
Since the beginning of 2024, only one regional bank in the United States has closed.
Last month, the Federal Deposit Insurance Corporation (FDIC) took over $4 billion in deposits and $6 billion in assets from Republic First Bank, which owns a large amount of commercial real estate.
Others echoed Sternlicht\’s warning.
RXR CEO Scott Rechler made a similar prediction earlier this year. He believes there will be 500 fewer banks in the U.S. by 2026.
\”Community banks are important to the fabric of our society,\” Sternlicht said in an interview Tuesday.

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