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Smoke on Cars

The Fed is Playing the Waiting Game, and Car Buyers Are Likely to Do the Same

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The Fed left monetary policy unchanged today at the conclusion of their third scheduled meeting of 2025. No changes have been made so far this year. This meeting did not include updated forecasts or dot plots, leaving the financial markets with little new information.

The market has been more optimistic about rate cuts in 2025 than the Fed’s position. The median expectation for rate cuts communicated in March was two, while the futures market has most recently reflected three cuts.

The Fed reiterated that it remains focused on its dual mandate. Its hands are effectively tied as announced tariffs are expected to drive inflation higher this year by at least a full percentage point. While they wait to see evidence of inflation moving up, the labor market remains strong, even though conditions are expected to deteriorate.

The bond market has been volatile over the last six months, with rising expectations of higher inflation, higher deficit expectations, and increasing odds of recession. The 10-year U.S. Treasury bond yield peaked near 4.8% in mid-January, hit a 2025 low of almost 4.0% in April and is up about a quarter from that low today. That is a substantial amount of volatility, causing loan rates to similarly move up and down so far this year.

The rate path from here is uncertain, and uncertainty doesn’t help consumers plan for finance-sensitive purchases like homes and vehicles.

The biggest change in auto loan rates over the last two months has been a direct response to tariffs, leading to tighter supply and higher prices in the new-vehicle market. As a result, manufacturers have been spending less on attractive auto loan offers.

Since February, incentives are down, vehicle prices are up, and the average new auto loan rate is unchanged, remaining just 36 basis points (BPs) below a 25-year high reached last June.

By contrast, in the used-vehicle market, where incentives do not influence rates as heavily, average rates were at a 25-year high in February but have since fallen by about 80 BPs to just under 14% on average this week.

Consumers jumped initially to buy ahead of tariffs, driving prices higher. Now, vehicle supply is tighter, prices are rising, and incentives are falling, adding to the pressure of keeping rates high. And all of these dynamics suggest that consumers may soon join the Fed in waiting to see what happens.

We are expecting volatility this summer in rates, prices and sales. When rates and prices move higher, sales are likely to fall. When lower sales lead to lower prices and more attractive rate offers, sales are likely to increase. Consumers are far more price and payment sensitive than they were back in 2021.

Chair Powell said today that the Committee doesn’t have to be in a hurry. It’s likely that car buyers will be taking a similar approach as well.

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.

Tariffs: Our Insights

The Cox Automotive Economic and Industry Insights team is closely monitoring tariff developments and regularly publishing insightful commentary and analysis as appropriate.

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