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Smoke on Cars

The Fed Is Not Tapering Yet, But Could as Soon as November


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U.S. monetary policy was unchanged today as the Fed issued their official statement following their sixth meeting of 2021. The most important information coming out of this meeting was direction on future policy, namely when tapering might begin and if the schedule for possible rate liftoff is accelerating. Tapering we learned is likely coming soon, but not yet.

The changes made to the official statement compared to the prior statement in July highlighted the dilemma that the Central Bankers face. They acknowledged that the rise in COVID cases has slowed the recovery, but they also acknowledged that inflation is elevated.

Changes in policy still hinge on substantial progress toward maximum employment and price stability goals. The official statement said, “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”

Thus, the Fed is not reducing its ongoing program of buying Treasury bonds and mortgage-backed securities yet but presumably will as soon as the next Fed meeting on November 3. That time frame should also be past other near-term challenges related to the debt ceiling and funding of the Federal government.

This meeting again had a unanimous vote on the current policy. However, this meeting also provided an update on future rate expectations, which revealed a split committee regarding rate increases beginning in 2022 or 2023.

The latest rate dot plots from Fed officials show the median participant with the first rate hike before the end of 2022 rather than the summertime view of the first rate hike in 2023. Of 18 officials, nine expect at least one rate increase before the end of 2022, and three see at least two increases by that time. By 2023 only one official sees no rate increases by the end of the year compared to now, and nine officials see four or more increases.

The median forecast for inflation for this year has been substantially increased while the expectations for GDP growth were reduced. Inflation and GDP growth expectations for 2022 were also increased.

Bond yields moved lower to end the day after the financial markets digested the new information. Yields remain closer to the lows for the year compared to the highs reached in late March and early April. The financial markets continue to struggle with the economic conflict from declining growth caused by COVID up against the inflation experienced this year.

Consumer loans like auto loans and mortgages are more directly related to these longer-term yields rather than the Fed’s short-term rate policy. The 10-year yield is up 63 basis points year-over-year. However, consumer rates on auto loans have not moved up so far this year as yield spreads on auto loans have narrowed. Spreads had widened last year during the pandemic, especially for lower credit tiers.

As spreads have narrowed to be more in line with spreads prior to the pandemic, most borrowers have seen lower rates even as bond yield have been higher year over year. The auto market has enjoyed stable and favorable credit trends all year. It is likely that consumers will continue to see low and attractive rates on auto loans and more favorable terms. As a result, payments have not grown as much as vehicle prices have.

The movement in spreads is one input into our view of credit availability, which has shown that auto credit is now easier to get than a year ago across all major types of auto loans.

Average auto loan rates are down slightly so far in September, and average rates for all credit tiers continue to be lower than a year ago.

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