Latest No-Rate-Change Decision Marks Start of a Long Summer of Waiting

The Fed left monetary policy unchanged today at the conclusion of its fourth scheduled Federal Open Market Committee (FOMC) meeting of 2025. This was the fourth consecutive no-change decision this year, but this meeting featured souring forecasts with lower economic growth, higher inflation, and higher unemployment. Their median expectation remains for two rate cuts in 2025, but more voting members are leaning towards no rate cuts.

The median expectation for economic growth in 2025 fell from 1.7% to 1.4%, while the median unemployment rate expectation increased to 4.5% from 4.4%. Their median forecast for inflation increased to 3.1% from 2.8%.

The Fed remains on hold as they await data on inflation that reflects the impact of tariffs, while they also carefully watch labor market conditions. The Fed Funds Rate remains unchanged at 4.25-4.50%, which is widely considered to be restrictive. The policy announcement indicated that they will assess labor market conditions, inflation pressures and expectations, as well as financial and international developments, to guide future policy changes.

The FOMC decided to continue reducing its holdings of Treasury securities, agency debt and mortgage-backed securities on its balance sheet. That balance-sheet runoff should reduce upward pressure on rates for longer-term bonds, all other factors being equal.

The bond market sold off at the end of 2024 and the very beginning of 2025, with rising expectations of higher inflation as well as higher deficit expectations. The 10-year U.S. Treasury bond hit a peak in yield in mid-January, but yields have been volatile all year and remain higher than in 2024. Bond yields increased modestly today after the Fed decision.

The move up in bond yields this year has contributed to an increase in interest rates on auto loans. Yield spreads remain relatively wide as lenders see more risk in the economy and are concerned about loan performance with slowing growth, weakening labor market conditions, and potential for higher inflation pressure.

Average rates on auto loans have risen so far this year, with the average new-vehicle rate in June at 9.52%, up 84 basis points (BPs) year to date but down 13 BPs from a year ago. The average used rate has increased 73 BPs year to date to 14.18% and is up 24 BPs year over year. The average used rate hit a 25-year high in February at 14.79%.

This high level of auto loan rates, combined with higher vehicle prices driven by tighter supply and tariff pressures, has reduced affordability and limits potential demand. The outlook is not good for relief on auto loan rates anytime soon. The Fed is unlikely to cut rates before the end of the year. Likewise, longer-term bond yields are unlikely to decline significantly and carry more risk to the upside due to growing Federal deficits requiring increased treasury issuance.

Welcome to a long, slow summer of waiting. The Fed will be waiting for clear data evidence, financial markets will be waiting for the Fed, and consumers and fleet buyers will be waiting to see what happens with tariffs. This is not a recipe for sustained, healthy demand for vehicles, especially new ones. It could be a very long summer indeed.

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.