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Smoke on Cars

Fed Rate Cut Unlikely to Help Average Car Buyer

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Article Highlights

  1. The Fed officially cut the short-term rate policy by a quarter-point, citing slowing economic growth both globally and domestically.
  2. This quarter-point policy cut likely won’t help the average car buyer.
  3. s the Fed has cut rates three times this year, average rates on new-vehicle loans have barely improved with rates actually increasing for consumers with weak credit.

The Fed officially cut the short-term rate policy by a quarter-point, citing slowing economic growth both globally and domestically. This was the third cut this year, so rate policy is back to the range we had in the spring of 2018 before the June 2018 increase. As in September, the decision was not unanimous, as two members favored no cut. They also again avoided communicating clear future plans but instead affirmed they would continue to “act as appropriate.” Recent economic data suggest that future cuts may be less likely as economic growth seems to be stabilizing while core inflation is getting closer to the Fed’s target. It will take a worsening outlook to see interest rates much lower than they are today.

This quarter-point policy cut likely won’t help the average car buyer. As the Fed has cut rates three times this year, average rates on new-vehicle loans have barely improved. Rates have actually gone up for consumers with weak credit. Going into the Fed meeting, auto rates have drifted higher in October. Unless we see a decline in longer-term bond yields following the Fed decision, even consumers with the best credit scores may not see better auto loan rates.

Yesterday’s consumer confidence report from The Conference Board highlights the key concern about consumer demand for durables falling when their expectations begin to dim. As consumers become less optimistic about the future, they pull back on plans for big discretionary purchases such as new vehicles.

With auto loan rates drifting higher in October, dealers and automakers will have to continue with heavy incentives and discounts to help stave off dropping retail demand. With the headlines highlighting a third cut this year by the Fed, the average consumer is likely to be disappointed with the rates they see in the real world.

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