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COVID-19 BUSINESS UPDATES

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U.S. Federal Reserve Raises Short-Term Rate Policy

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Article Highlights

  1. The Federal Reserve today raised the official short-term rate policy by .25 points.
  2. The move by the Federal Reserve was widely expected, the result of continued strong economic growth combined with inflation reaching the Fed’s target.
  3. The Cox Automotive Industry Insights team continues to monitor interest rate trends, as higher rates and tighter credit are already leading to softening retail demand.

The Federal Reserve today raised the official short-term rate policy by .25 points. The move by the Federal Reserve was widely expected, the result of continued strong economic growth combined with inflation reaching the Fed’s target. The Cox Automotive Industry Insights team continues to monitor interest rate trends, as higher rates and tighter credit are already leading to softening retail demand.

Below you will find commentary from our leading economists. If you would like to speak to one of experts or analyst, just reach out. We would be happy to help you.

Cox Automotive Chief Economist Jonathan Smoke:
“The Federal Reserve increased its Federal Funds Rate for the seventh time since 2015, as the target for short term rates is now in the 1.75-2.00% range, a full percentage point higher than a year ago. These increases are impacting lending and borrowing costs across the U.S. economy. Average rates on automotive loans are up slightly more than a percentage point over last year and near seven-year highs.

The 1 percent increase on the average auto loan we’ve already seen has increased the average monthly payment by $14. Throw in higher vehicle prices, and average payments are up over 4 percent from last year. Higher rates are a problem for a consumer-driven economy as interest rates rise, debt service takes up a bigger chunk of income. Data on personal income and consumption through April indicate that US consumers have seen a 12 percent increase in interest payments year-over-year.”

Cox Automotive Senior Economist Charlie Chesbrough:
“Buyers aren’t the only market participants effected. Manufactures and dealers are also impacted by higher interest rates. For OEM incentive spending, the cost of providing low interest rate loans goes up. For a $35K vehicle, providing ‘0-for-60’ at 2.9% vs 3.9% is a difference of over $900. And for dealerships, the cost of acquiring and maintaining inventory – floor planning – also rises, which shaves a little deeper into already tight profit margins. For suppliers, their own operating costs – often borrowing to finance vehicle program fulfillment – goes up. The automobile industry is cash intensive. Rising interest rates impact all corners of the business.”

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