The Fed Will Keep Rates Low, But That Alone Won’t Sell Cars

Little new information emerged from the Fed today as they issued their official statement following their December and final meeting of the year.

In fact, the only change in the official statement was more specific details about their program of buying Treasury bonds and mortgage-backed securities. There was no change in their language describing the economy or their assessment of monetary policy.

Forecast details affirmed the previous plan to keep rate policy low through 2023. Expectations for 2021 modestly improved. The Fed intends to support the economy with low rates and quantitative easing until “…substantial further progress has been made toward the Committee’s maximum employment and price stability goes.”

This meeting again had a unanimous vote on the current policy.

Longer-term Treasury yields have been moving higher this fall, and presumably, some of the Fed’s future attention may be placed on buying longer-dated bonds to keep longer-term yields from moving even higher. This is critical as consumer loans like auto loans and mortgages are more directly related to these longer-term yields rather than short-term rate policy.

The 10-year U.S. Treasury yield moved up slightly today and is near its highest level yet during the pandemic.

Consumer rates on mortgages and auto loans have not followed the 10-year yield higher this fall, as yield spreads have narrowed. In other words, lenders are providing lower rates to consumers despite the underlying yields being higher.

This is one input into our view of credit availability, which has shown that credit has loosened this fall.

That means from a financing perspective, it is a better time to buy now than it was this summer or earlier this fall.

Yet despite these better conditions, we are not seeing auto demand respond. November saw a notable softening in sales, especially in the back half of the month as the third wave of COVID-19 grew. Consumer sentiment has also declined since October as conditions worsened.

The Fed’s actions may not influence much in the near term as attention focuses more on stimulus, the initial distribution of vaccines, and when we see signs that this third wave of the pandemic has passed its peak. The Fed is keeping rates low and credit broadly available, but this alone will not keep Americans buying.