No Change in Rate Policy as Fed Waits for Evidence of Shifts

The Fed left monetary policy unchanged at the conclusion of their first meeting of 2025. This followed three consecutive meetings in the fall of last year in which they reduced the Fed Funds Rate by a full percentage point.

The Fed meeting this week offered few new facts or insights about their perspectives. The latest forecasts provided were in December, when their outlook for additional rate reductions in 2025 was reduced to just two possible quarter-point reductions.

The Fed has communicated that it intends to be data-driven, but they have few new facts on detailed policy changes and little new data indicating much change in trends in the economy, labor market, or inflation. The Fed remains poised to see what unfolds.

Many economists and market analysts believe that President Trump’s priorities could lead to increasing inflation if enacted, but we are likely months away from seeing substantial changes affecting the economy. Nonetheless, we have seen the bond market react to higher inflation and/or higher deficit expectations, and that has moved interest rates on consumer loans in the wrong direction in January.

Last year, auto loan rates declined almost a full percentage point in the fourth quarter on new loans and decreased half a point on used loans. These lowered rates boosted retail demand.

However, longer-term bonds have sold off in recent months, sending yields higher. The 10-year peaked at 4.80% earlier in January. Bond yields have since declined by more than a quarter point but remain well higher than in the fall of last year.

The increase in bond yields has influenced auto loan rates to move higher in January. The volume-weighted average new auto loan interest rate is up 61 basis points (BPs) to 9.25% from a low of 8.64% in December. The average new rate remains lower year over year by 47 BPs and remains lower from last year’s spring peak by three-quarters of a point.

The average used auto loan rate has increased 48 BPs to 13.88% from 13.40% in December. The average used rate remains lower year over year by 32 BPs and lower than the spring peak by nearly three-quarters of a point.

The path for rate policy in 2025 is more uncertain and could even increase if inflation picks up. The path for bond yields is also uncertain and could move without a change in rate policy.

The possibility of higher rates, along with the possibility of higher vehicle prices from tariffs, changes buyer psychology. It is no longer the case that waiting to buy could produce a better deal or better payment. Therefore, the market’s current momentum may not change.

While the rate direction is uncertain, I suspect that the next few months could see the best rates for the year if lenders see market potential along with declining risk. Lender confidence in the economy and in future used-vehicle value trends, along with improving loan performance this spring, could see them reduce yield spreads, which is the premium over their cost of capital to compensate for risk. If so, auto loan rates may still decline despite the Fed and the bond market. However, the possibility for large declines has diminished.

Tax refund season began this week, and tax refunds typically lead to improving loan performance AND increased demand for vehicles. By the time the Fed announces its next policy decision on March 19, we should see evidence of the impact of this year’s tax refund season.

The rate direction should be clearer by then.

Jonathan Smoke

Chief Economist

Jonathan Smoke leads Cox Automotive’s economic and industry insights team, which tracks key metrics and trends impacting both the wholesale and retail markets for vehicles informed by the proprietary data from the company’s businesses and platforms. For 28 years, Smoke has focused on translating data and trends into relevant actionable insights for the industries that represent the biggest purchases that consumers make in their lifetimes: real estate and automotive. Smoke joined Cox Automotive in 2017.