The Federal Reserve held its target interest rate Wednesday (Oct. 28), though other economic factors are pushing auto rates higher moving toward the end of the year.
Driving the news: While inflation continues above the 2% goal rate, at 3.7% according to the October Consumer Price Index by the Bureau of Labor Statistics, the Federal Open Market Committee concluded its second-to-last meeting of the year by voting to keep the target rate between 3.75% and 4%.
For context, the FOMC raised the rate for the first time in three years in September.
Meeting participants in September predicted at least one more rate hike before the end of the year, and Federal Reserve Chairman Kevin Warsh said a decision in December would be determined by the data.
“The Committee believes that the accumulation of more information will help it determine the policy stance appropriate to ensure a timely return of inflation to the 2 percent goal,” Warsh said. “The Committee will deliver price stability.”
Economic picture: Warsh noted resilience in the overall economy with gross domestic product growing by 2.4% in the first half of the year.
On the labor front, the economy added 29,000 jobs in September and unemployment remained consistent with the rest of the year at 4.2%, according to the BLS.
Earnings are up 3% over the past 12 months.
“And yet Americans, of course, are still dealing with inflation that has been running above the Committee’s objective for close to 6 years. It’s our responsibility to get inflation down,” Warsh said.
Impact of gas prices: Warsh noted energy costs continue to put pressure on Americans and have impacted market interest rates.
The national average for gas prices was at $4.24 this week, according to AAA, which is $1.20 above last October.
Diesel prices were at $6.34, nearly $3 more per gallon than a year ago.
In September, the BLS stated a 9.1% increase in gasoline prices accounted for more than half of the monthly all-items increase.
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Auto market impact: Cox Automotive’s Dealertrack put the average new-vehicle rate in September at 10.17% and the used-vehicle rate at 14.34%, both up more than 0.25% since August.
Carlos Garcia, an economist with Moody’s Analytics, told CDG News that auto rates are rising as 10-year Treasury yields rise.
“Over the final two months of the year, I'd expect auto loan rates to hold near current levels or edge a bit higher,” Garcia said. “The average new-vehicle loan rate rose to about 10.2% in September, up from 9.9% in August and nearly a full point higher than a year earlier, and near-prime borrowers are paying around 14.3%. If the 10-year Treasury eases somewhat from its recent high, that should limit further increases, but it's unlikely to bring rates meaningfully lower before year-end.”
Looking ahead: Rising rates are expected to impact near-prime borrowers, Garcia noted.
“Higher rates push more of these borrowers past lenders' payment-to-income limits, which means smaller approvals, bigger down payments, longer terms, or no approval at all,” Garcia said.
The subprime share rose to 17.4% in September, up 230 basis points year over year, according to Dealertrack.
Garcia noted most of the growth was from finance companies and nonbank lenders.
“Banks are still keeping subprime standards tight,” Garcia said. “Higher rates would likely reinforce that split, and some near-prime borrowers who no longer qualify with banks will likely move to nonbank lenders at higher rates.”
Bottom line: Auto rates are expected to stay elevated and could go higher. The Fed could also add another rate hike in December.
Garcia noted that some OEMs and their captive lenders may look to offset the impact with rate incentives.
“With market rates elevated, a lower APR addresses the monthly payment more directly than a cash discount,” Garcia said. “Those offers will likely stay targeted on models where inventory is building or demand is softer, not across the board. We're already seeing incentives help offset some of the strain from rising financing costs, and that should carry into the year-end selling season.”
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