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Smoke on Cars

The Fed Remains Patient on Rate Policy, and the Market Sends Rates Lower


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As expected, the Fed left interest rates and overall monetary policy unchanged today. We have now had three straight meetings with no change in rate policy. The biggest changes from the Fed are in words and forecasts.

Financial markets have changed perspective quite a bit since the last Fed meeting. Bond yields and real consumer rates have declined. Macroeconomic data show that inflation has eased further while the U.S. economy has slowed, and the labor market is cooling off.

The Fed has yet to give up on the prospect of pushing rates higher, but their new language indicates that increasing rates further is only an option and not their expectation. This is as close to being done raising rates without saying, “We’re done.”

Updated forecasts indicate that the Fed believes we will see a soft landing and that unemployment need not rise much more to achieve price stability.

Including today’s 18 basis points (BPs) decline, the 10-year U.S. Treasury yield has declined by nearly 75 BPs since the last Fed meeting as financial markets shifted to expecting rates to fall in 2024. However, the updated dot plot from the Fed reflects that the median expectation is for only three-quarters of a point potential decline in the Fed Funds Rate by the end of 2024.

The key question now is the timing of the first cut, and Fed Chair Jerome Powell indicated that the first rate cut will come before inflation hits their target.

Auto loan rates have declined in December. The average new loan rate almost reached 10% in October and is now down to 9.6%. The average used rate peaked at 14.4% in mid-November and is now down to 14%. Mortgage rates have come down even more as the average mortgage rate topped 8% in October and is now below 7%.

High rates clearly limit who can buy expensive goods that require financing. High rates also impact businesses like dealers who carry costly inventory. We could see rates remain high or even increase from where they are today because of the continuing liquidation of the Fed’s balance sheet, otherwise known as Quantitative Tightening (QT), combined with substantial new debt issuance by the U.S. Treasury. The Fed has not communicated any plans to stop or change the pace of that runoff.

However, the economy has resisted a recession thus far. With lower prices on new vehicles and depreciation returning to used vehicles, affordability has modestly improved despite the increase in rates. Affordability limits demand, but affordability should improve more in 2024 as prices continue to fall thanks mostly to discounts and incentives and as rates hopefully begin to decline as well. It is now a question of when that starts and by how much.

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.

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