Fed Affirms Continued Low Rates, But Not All Consumers Are Seeing Them

The Fed affirmed its rate policy will remain where it is “…until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Rates are expected to remain where they are through 2022. Chairman Jerome Powell, in a meeting earlier today, acknowledged some recovery in jobs and activity in May but described unemployment as historically high and suggested that a full recovery is not likely to occur until the health crisis is over and people are confident in returning to normal behavior.

The Fed did not entertain negative rates but instead affirmed to continue supporting the flow of credit to households and businesses by buying Treasuries and mortgage-backed securities. Chairman Powell stressed that these are lending powers, not spending powers, as he hinted to the need for stimulus programs.

Rates declined today in reaction. The 10-year Treasury had moved higher in the last week as positive data about the economy and recovery in jobs has driven financial markets higher. Today’s rate decline erased much of last week’s gains, which keeps it lower than it was at the end of February by nearly 40 basis points.

Consumer rates on mortgages and most auto loans are currently lower than they were in February as a result of the Fed’s actions. The exception has been in subprime new auto loan rates, which are higher as a function of spreads rising as lenders become more cautious and tighten standards.

While credit remains available and is supporting the recovery in retail vehicle sales, the composition of credit has been shifting toward higher credit tiers as lenders tighten standards and become more selective in which loan applications they approve.

All credit tiers have seen a decline in unique approval rates on new-vehicle loans since February. Lower credit tiers saw further declines in May. Approval rates are also down for used, but not as much. Approval rates have declined the most when measured at the lender level, as lenders have become more selective. However, we did see some improvement at the lender level in May.

The most aggressive lending is coming from captives in the new-vehicle market. Since the end of March, most captives have been offering 0% financing at extended terms that also often included payment deferrals. The share of such deals rose to 21.4% in April but has been declining since. Through last week, the share of such offers in June was 14.1%.

Terms extended in April, but mainly because of the new loan programs offered by the captives. We still saw loans with terms of 72 months or longer with a high share in May (37%, +10 percentage points year over year, but down from a 43% share in April.) This alone is aggressive, but captives cater to high credit tiers, and the approval rates show that they have become more selective even in the highest credit tier.

As a result of this shift in lending, the credit tier composition has also changed. The share of loans to people with a FICO score of 720 or higher gained 10 points of share year over year in new loans in May and 3 points in used as a result of credit tightening favoring the highest tier. These borrowers were 62% of the new market in May. Lower tiers lost share in both new and used. Subprime has lost more than 2 points of share in total vehicle loans year over year while above 720 has gained more than 4 points. FICO scores of 720 or higher were more than half of auto loans in May.

The Fed’s actions have led to lower rates, and it looks like they will try to keep rates low. However, not everyone can get the lower rates. Lower rates are helping to drive down average loan payments, but the consumers getting those lower payments are much more likely to have the best credit scores.