The Federal Reserve made the first cut to rate policy so far in 2025 at the conclusion of its sixth scheduled Open Market Committee (FOMC) meeting for the year. The policy statement and commentary from Chair Powell after the meeting emphasized downside employment risks, but details in the decision and updated forecasts reflect divided views of the economy by committee members.

The updated forecasts show that the Fed is expecting slightly stronger economic growth this year and next year, with slightly higher inflation and slightly lower unemployment in 2026. While the median expectation has increased to two additional rate cuts in 2025, nearly half of voting members see only one or no additional cuts in 2025. As Chair Powell noted, when the dual goals of the Fed are in tension—with risks to inflation tilted to the upside and risks to employment to the downside—the situation is challenging and the path forward is unclear.

The median expectation of economic growth in 2025 increased to 1.6% from 1.4%, while the median unemployment rate expectation was steady at 4.5% and the median forecast for inflation was steady at 3.1%.

The Fed Funds Rate is now 4.00-4.25%, which is widely considered to be restrictive, meaning that there is room for additional cuts if risks to the labor market persist.

The 10-year U.S. Treasury bond moved 4 basis points (BPs) higher today to 4.07%. After today’s increase, the 10-year has fallen 16 BPs in September and is now down 50 BPs for the year. The average mortgage rate has fallen 35 BPs in September and is now down 92 BPs this year.

Auto loan rates, on the other hand, have moved in the opposite direction in September. The average new rate has increased 34 BPs to 9.43%, which is up 75 BPs year to date but down 14 BPs year over year. The average used rate in September has increased 22 BPs to 14.15% and is up 70 BPs year to date and 18 BPs year over year.

The September moves—both higher—are a bit misleading, though, as what is driving the new-market rates higher is a decline in financing incentives, which is a function of tighter new vehicle supply. In the used-vehicle market, the higher rates are due to a small move higher only in subprime rates, combined with volume growth in subprime loans.

These factors driving rates higher generally reflect stronger vehicle demand, which is a good indication of market health. But with higher rates, demand may be more challenged in September and Q4 than in July and August.

Retail demand continues to ride a roller coaster. With new-vehicle supply tight and production on the decline because of changes in regulations and trade, the retail story is shifting to one of even tighter supply and lower incentives and discounting. With fewer incentives in place, new-vehicle loan rates can rise even when bond yields are falling and the Fed is cutting.

For vehicle shoppers, the when-to-buy decision continues to be a challenge: Waiting for supply to rebuild could be risky, especially if automakers cut production further and/orincrease prices because of tariffs.

Today’s updated dot plot suggests that Fed officials only expect rate policy to fall by 1 percentage point by the end of 2027. That is not significant relief and again suggests that consumer credit scores are far more important than Fed actions.

As we have noted before, by improving their credit tier by one level (approximately 100 points), consumers can lower the loan rate they are offered by 2-or-more percentage points. Currently, buyers with credit scores above 760 are seeing average rates of 5.5% on new loans and 7.0% on used loans, significantly below industry average. These buyers are likely higher-income consumers who have been more confident about the market, have been continuing to spend, and are helping keep vehicle sales remarkably strong.