No Change in Rate Policy As Outlook Weakens

The Fed left monetary policy unchanged today at the conclusion of the second scheduled meeting of 2025. Following a similar no-change decision in January, this meeting featured updated forecasts and future rate perspectives, and the updated outlook is for less growth, more inflation and higher unemployment. None of that is good news for the auto industry.

The median expectation for rate cuts in 2025 remains two, unchanged from December. Importantly, the distribution of views was less varied, with fewer Fed Open Market Committee (FOMC) members having expectations of multiple cuts and more having expectations of one cut or none.

The median expectation of economic growth in 2025 fell from 2.1% to 1.7%, while the median unemployment rate expectation increased to 4.4% from 4.3%. Their median forecast for inflation moved up to 2.7% from 2.5%.

The Fed remains focused on their dual mandate, but trade policy changes being pursued by the Trump administration are making that challenging. The Fed Funds Rate remains unchanged at 4.25-4.50%, which is widely considered to be restrictive. However, with inflation expectations rising, the Fed cannot cut rates further even though labor market conditions are expected to deteriorate.

The FOMC decided to slow the balance-sheet runoff pace, which should reduce upward pressure on longer-term bonds.

The bond market sold off at the end of 2024 and the very beginning of 2025 with rising expectations of higher inflation and deficit expectations. However, since a mid-January peak in the 10-year U.S. Treasury bond, yields have fallen by over 50 basis points (bps). Bond yields declined today with the Fed decision.

The initial increase in bond yields led to interest rates on auto loans increasing this year. We have yet to see rates move down with bond yields declining, which means that yield spreads have expanded as lenders become less positive about the economy and more concerned about how loans will perform with slowing growth and higher inflation pressure.

Last year, auto loan rates dropped almost a full percentage point in the fourth quarter for new loans and half a point for used loans. Those declines boosted retail demand, but the declines coincided with decreasing inflation, strong and stabilizing economic growth, and expectations for further rate cuts.

So far this year, the average new auto loan rate has increased a full point, erasing the fourth-quarter declines. The average used auto loan rate has increased more than a point and a quarter, setting a new 25-year high in February.

We have yet to see any clear negative impact from higher rates as retail demand has appeared healthy and in line with normal tax-refund-season activity. It is possible that consumers no longer have expectations of lower rates and have adjusted accordingly. While affordability limits what is possible, 25-year highs in rates force consumers to consider older vehicles to find a price that will deliver a workable monthly payment.

The economy is still growing, and the unemployment rate remains near full employment, but if growth weakens more, vehicle demand will eventually diminish. Should tariffs go into effect on Canada and Mexico as planned on April 2, demand could surge initially as consumers in need of a vehicle act to purchase existing inventories before prices rise.

If tariffs persist, vehicle sales will eventually decline as prices rise. Auto manufacturers are also likely to cut production, keeping supply tight. Some affordable models may be eliminated due to increasing costs that make them no longer attractive to buyers, and that ironically will cause average prices to rise further even when sales are declining. The auto market appears to be on the cusp of a time reminiscent of 2021-2022 but without the benefit of low interest rates.

As the first quarter of 2025 comes to a close, our market, the economy and the daily headlines are all projecting conflicting signals. What we have in the market today is a new kind of uncertainty – and if there is one thing we know for certain, the auto industry does not respond well to uncertainty.

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.