Barry Sternlicht says the Fed's 'tool kit is flawed' for this economy, urges Fed rate cuts

By Joy Wiltermuth

Regional banks and cities are reeling from wobbling commercial real estate, says Starwood Property Trust's CEO

'This economy is not your grandmother's economy.' Barry Sternlicht, chairman and CEO of Starwood Property Trust

That's real-estate mogul Barry Sternlicht, chairman and chief executive of Starwood Property Trust, saying that the Federal Reserve doesn't have the right "tool kit" to sufficiently tame inflation through higher interest rates in this economy.

"He has to be super careful because his tools - his tool kit is flawed," Sternlicht said Wednesday during Starwood's (STWD) first-quarter earnings call, while urging Fed Chair Jerome Powell to cut rates before November's election.

"The economy is not doing what we expected it to do, which is cave," he said. "And it's very simple, and why Americans have jobs, their balance sheets are fixed. They have fixed-rate mortgages. They've got $235 billion of interest income from their cash that's sitting in money-market accounts earning 5%."

Cracks, however, have begun to appear in consumer credit following the Fed's most aggressive rate hikes since the 1980s. But Sternlicht views the "biggest victim" of higher rates as being the federal government, which has seen its interest expenses roughly double since 2020 to $1 trillion.

Regional banks have been the victim of other "collateral damage," with rate hikes "throwing into disarray the valuations of commercial assets all over the country, and I'd say all over the globe," Sternlicht said.

Spillover isn't "just an academic thing," he said. "Because the cities and municipalities depend on the real-estate taxes from these commercial assets to run their schools and police and waste management and all the other services they provide their communities."

On a brighter note, Sternlicht touted tech innovation, pointing to new announcements by Meta Platforms Inc., (META) and Microsoft Corp. (MSFT) around the construction of data centers, an area that Starwood has been "quite active."

Read: AI is fueling a gold rush in new data centers, the hottest buildings in real estate

Starwood's shares gained 2.7% on Wednesday, while the Dow Jones Industrial Average DJIA gained 0.4%, extending its longest win streak of the year. The S&P 500 index SPX closed unchanged, while the Nasdaq Composite Index COMP fell 0.2%, according to FactSet.

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-08-24 1645ET

Copyright (c) 2024 Dow Jones & Company, Inc.