The Fed Stays Course

Little new information emerged from the Fed today as they issued their official statement following their first meeting of 2021.

The biggest change in the official statement was acknowledging that “…  the pace of the recovery in economic activity and employment has moderated in recent months.” The Fed is clearly staying on course with its low rate policy and quantitative easing through their ongoing program of buying Treasury bonds and mortgage-backed securities.

This meeting again had a unanimous vote on the current policy.

Longer-term Treasury yields moved higher earlier this month following the outcome of the Georgia Senate elections that changed the balance of power in Congress. This is critical as consumer loans like auto loans and mortgages are more directly related to these longer-term yields rather than short-term rate policy.

However, Treasury yields declined especially over the last week. The 10-year U.S. Treasury yield moved down today and is at its lowest level since January 6.

Consumer rates on mortgages and auto loans have not moved as much as the 10-year yield so far in January, as yield spreads narrowed. In other words, consumers have seen less movement in rates in January than the movement in the 10-year.

The movement in spreads is one input into our view of credit availability, which showed that auto credit loosened this fall as lenders were encouraged by strong loan performance. All other factors being equal, when lenders narrow spreads, they are making credit more accessible.

However, in the first half of January we are starting to see other factors move towards tighter conditions. For example, approval rates have edged down, down payments have risen, and terms on loans have shortened. The share of subprime has fallen as well. Therefore, from a financing perspective, conditions are trending to make it slightly harder to get an auto loan now than it was in December.

January is typically a very light month for retail vehicle sales, but so far the modest tightening we are seeing has not negatively impacted the market. We are expecting new-vehicle sales to see a slight gain over December.

We continue to believe that the Fed’s actions may not influence much in the near term as attention focuses more on stimulus, control of the pandemic, and the rollout of vaccines. The Fed will keep rate policy low and will ensure that credit is broadly available. Yet as we have seen throughout the pandemic, what individual consumers see is more related to longer-term yields and their own credit scores.