Fed Affirms Continued Low Rates, But Monetary Policy Won’t Help Car Buyers This Summer

As they did in June, the Fed today affirmed 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.”

It is important to note that the Fed believes that the economy cannot recover until the risk of COVID-19 has been significantly reduced: “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Chairman Powell acknowledged we have entered a new phase in dealing with COVID-19 because of the rise in cases this summer and that indicators suggest economic activity has slowed as a result.

The Fed reiterated its mandate is to ensure maximum employment and price stability while also safeguarding the stability of the financial market. Chairman Powell stressed the importance of ensuring the flow of credit and highlighted the extension of their lending programs through the end of the year. The Fed did not entertain negative rates or yield-curve control in the issued statement or in Chairman Powell’s press conference.

Chairman Powell did note that fiscal actions taken thus far have been critical to the economy, but it will take extended support to get through the crisis.

Rates barely moved today in reaction. Before today, the 10-year Treasury had already drifted lower to be near the lows we’ve seen since the end of March.

Consumer rates on mortgages and most auto loans are currently lower than they were in February as a result of the Fed’s actions, but in June and July auto rates have moved slightly higher while mortgage rates remain close to all-time lows.

Looking at new auto loan originations, auto credit has tightened since April. While credit remains available and has been supporting the recovery in retail vehicle sales, the composition of credit has been shifting towards higher credit tiers as lenders tighten standards and become more selective in which loan applications they approve. Likewise, even those with higher credit scores are seeing slightly higher rates and less beneficial terms than available in April and 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, and credit tightening seems to be leading to modestly higher, not lower, auto loan rates. Combined with higher new and used vehicle prices, payments are likely to drift higher. Higher payments will limit the strength of demand and will likely remain this way as long as supply and credit conditions are tight.