As widely expected, the Federal Reserve cut the target range for the federal funds rate by 25 basis points to 2% to 2.25%, marking the first downward move by the Federal Open Market Committee (FOMC) in 11 years.
A trio of experts who view the economy through the automotive prism and share their analysis with SubPrime Auto Finance News generally approved the action by policymakers carried through by a 7-2 vote. However, this group is waiting to see what kind of material impact might develop as consumers continue to use auto financing for their vehicle purchases.
“Although expected to be down relative to 2018, U.S. light-vehicle sales remain at a fairly healthy level,” said Mike Wall, executive director of automotive analysis at IHS Markit. “Nevertheless, vehicle affordability concerns driven by rising interest rates, moderating OEM incentives and rising average transaction prices have presented headwinds for the market.
“Overall, sales have been fairly resilient, yet somewhat volatile month-to-month,” continued Wall, who was among the speakers during the recent Automotive Intelligence Summit. “The Fed’s decision to reduce interest rates by a quarter point is expected to provide a modest level of near-term relief relative to the aforementioned affordability pressures, although likely not enough to significantly alter the overall light-vehicle demand outlook for the market.”
This week’s action arrived after the Fed kept the rate steady after each of its chances to make a move earlier this year as well as lifting the rate four times in 2018.
KAR Auto Services chief economist Tom Kontos told SubPrime Auto Finance News that these rate cuts will help the economy.
“New- and used-vehicle sales and wholesale used-vehicle prices will all benefit,” Kontos said. “In fact, lower payments in a payment-driven industry like automotive are always helpful.
“I anticipate this will also help U.S. vehicle exports. Vehicle export prices will be more competitive versus vehicles produced in countries and regions that are easing their monetary policies,” he continued.
“Finally, I was comfortable with the Fed holding interest rates, but I see this as an insurance move to support continued economic growth,” he went on to say.
Cox Automotive chief economist Jonathan Smoke shared his perspectives in a blog post. Smoke, who came to the company from the real-estate space two years ago, leveraged his mortgage background to examine how the Fed’s move might influence auto financing.
“The rate policy was taken back to what it was in November when the Fed officially cut the short-term rate policy by a quarter point today. At the same time, the Fed ended their balance sheet drawdown two months early. Going forward, they will be reinvesting in bond purchases as loans and bonds are paid. This should remove any upward pressure on long term rates. However, these moves today do not necessarily mean consumers will see any lower rates on mortgages or auto loans,” Smoke wrote.
“Mortgage rates are already lower compared to last November. They may not come down more, especially if the economy seems to stabilize. But then again, those lower rates don’t seem to be spurring more home sales. The lower rates are mainly creating a boon for existing mortgage holders to refinance,” he continued.
“Auto-loan rates have more room to decline, but that will depend on lenders’ perception of risk,” Smoke went on to note. “It will take a few days to see if consumer loan rates respond to the Fed’s action and language today. It will take several weeks to see if lower rates lead to more demand.”
What the action might mean in the non-prime world
SubPrime Auto Finance News also connected with Joel Kennedy, who is the current president of the National Automotive Finance Association. Kennedy addressed this week's developments from the perspective of finance companies who cater to non-prime consumers.
"While impacts to the non-prime auto sector in the short-run are not likely to feel any major impacts from the recent rate cut, there are some longer-range impacts that could result in lower inventories of used vehicles (as a function of slowed new vehicle manufacturing taking place today), and subsequent changes to auction values as well," Kennedy said.
"Consumer demand for a higher mix of used vehicles (even into the prime segment) and the market’s willingness to cater to this demand (dealerships making a shift, and fintech providers removing friction from the used car buying process) has been strong, but a lack of supply down the road is something that we should all keep an eye on," he added.
How the Fed arrived at its move
The latest FOMC statement reiterated its primary objectives while explaining why members took this latest action.
The Fed said this cut supports the committee’s view that sustained expansion of economic activity, strong labor market conditions and inflation near the committee's symmetric 2% objective are the most likely outcomes, but uncertainties about this outlook remain.
As the committee contemplates the future path of the target range for the federal funds rate, the Fed emphasized that it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
“So taking all of that on board, the committee still sees a favorable baseline outlook,” Fed chairman Jerome Powell said during the opening remarks of his press conference following the cut announcement. “Over the year, however, incoming information on global growth, trade policy uncertainty, and muted inflation have led the committee to gradually lower its assessments of the path of the policy interest rate that would best support that outlook. Today, we judge that those factors warrant the policy adjustment I described.
“As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective,” he went on to say during the press conference that can be viewed here.