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Smoke on Cars

The Fed Remains Steadfastly Accommodative, and Some Auto Loan Rates Are Lower

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Article Highlights

  1. The Fed is not changing monetary policy, so trends in the economy and in the auto market are more likely to impact the rates consumers see on auto loans in the near term.
  2. Even with bond yield and mortgage rates higher than the absolute lows last year, auto loan rates are not moving higher for every consumer.
  3. Some rates are lower, and that will keep demand strong.

U.S. monetary policy was unchanged today as the Fed issued their official statement following their third meeting of 2021.

The biggest changes in the official statement were in this section covering current conditions: “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened… Inflation has risen, largely reflecting transitory factors.”

Risks to the outlook remain, but in the craft of Fed-speak, those risks are no longer considerable.

The simple caption could read: “Nothing to see here; keep moving along.” 

The Fed is sticking to its game plan for 2021 by keeping rates at the zero-lower bound and continuing quantitative easing through their ongoing program of buying Treasury bonds and mortgage-backed securities. This meeting again had a unanimous vote on the current policy.

This meeting did not produce new forecasts. In March the Fed shared revised forecasts, which included seeing inflation as measured by Personal Consumption Expenditures (PCE) Index reaching 2.4% in 2021 and real GDP growth of 6.5%. 

That leaves the financial markets to start betting on when inflation economic growth and/or inflation force a change. Before rate policy is touched, the first change would be to reduce the bond buying.

Last June, Chairman Powell famously said, “We’re not even thinking about thinking about raising rates. The next meeting is in June this year, and that could mark the beginning of the thinking about thinking about raising rates. Today, Chairman Powell emphatically said, “It is not time yet.”

Longer-term Treasury yields had been moving higher this year as the U.S. moved forward with more aggressive fiscal spending under the new administration and with the progress on COVID-19 vaccinations leading to improving economic growth expectations. However, bond yields peaked at the end of March and retreated a bit in April.

After reaching a multi-week low in yields last week, rates started moving higher again this week. Yields did not change much today.

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 was up about 70 basis points at mid-day today compared to the end of last year.

However, consumer rates on auto loans have not moved as much as the 10-year yield as yield spreads have narrowed. In other words, consumers have seen less movement in rates and even in some cases improvement in rates that contrasts with the movement up in the 10-year. That’s because lenders have been willing to accept lower yield spreads with strong loan performance and record vehicle values. In fact, subprime borrowers are seeing much lower rates this spring than at any point in 2020.

The movement in spreads is one input into our view of credit availability, which showed that auto credit loosened in February and again in March. Average auto loan rates have moved in different directions by credit tier so far in April, but average rates for all credit tiers continue to be lower than a year ago.

The Fed is not changing monetary policy, so trends in the economy and in the auto market are more likely to impact the rates consumers see on auto loans in the near term. Even with bond yield and mortgage rates higher than the absolute lows last year, auto loan rates are not moving higher for every consumer. Some rates are lower, and that will keep demand strong.