The Federal Reserve held interest rates steady yesterday but signaled that it expects to begin cutting them later this year.
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” controls the interest rate for overnight loans between banks. That rate then trickles through the economy as banks change the rates used to make every other loan, including car loans, in response.
So, changes to Fed policy take time, but they affect the entire economy.
Higher rates, explains Cox Automotive Chief Economist Jonathan Smoke, “limit who can buy expensive goods that require financing. High rates also impact businesses like dealers who carry expensive inventory.” Dealers typically finance the cars on their lots, just like most buyers do when buying a new car.
Cox Automotive is the parent company of Kelley Blue Book.
The Fed raised rates through much of 2023, keeping auto loan rates high. The average new car loan peaked just below 10% in mid-October. It remained at 9.7% at the end of January.
The average used car loan peaked at 14.35% in mid-November and ended last month at 14.1%.
That makes borrowing to buy a car expensive. In response, automakers have tailored their lineups to suit wealthier, good-credit buyers. Most now build more expensive cars and fewer affordable cars than they have historically.
Lineups have grown so unbalanced that dealers are pushing back, asking the companies to build more affordable cars for consumers faced with expensive loan rates.
But, Smoke says, rate cuts are likely coming to provide some relief.
“Consumers and dealers could see rates fall by a percentage point or more before the end of the year as the Fed cuts rate policy,” he says. “The key question now is the timing of the first cut.”
Fed Chair Jerome Powell expressed skepticism that the first cut would come after the board’s next meeting in March. But, Smoke says, “the decision will depend on inflation data points between now and the next policy decision on March 20.”
The likely cuts feed into analysts’ predictions that 2024 could be a good year for car shoppers. Rate cuts, Smoke says, combined with “declines in new and used vehicle prices should improve affordability, especially in the second half of the year.”
