Fed holds steady on rates in Warsh’s first meeting

Car dealers should not expect relief from elevated interest rates anytime soon, as the Federal Open Market Committee (FOMC) announced Wednesday that it was maintaining its target interest rates at 3.5% to 3.75%.

A majority of FOMC members also don’t expect the rates to drop before the end of the year.

Welcome to the board: Wednesday concluded the first FOMC meeting for newly confirmed Federal Reserve Chairman Kevin Warsh, who replaced Jerome Powell after the end of his term.

Warsh reaffirmed the Fed’s commitment to price stability and maximum employment. He said the Fed will deliver on its mission to get inflation down to 2%.

Task forces: Warsh began his tenure by announcing the formation of five task forces that will include members of the Fed, along with individual business leaders. 

The five areas the task forces will be reviewing are:

“These subjects are timely, consequential, and worthy of a fresh look,” Warsh stated. “My colleagues and I discussed them with energy and purpose over the last couple of days. For each of these independent task forces, I'm enlisting some of the very best minds, both inside and outside the economics profession. They will be supported by subject matter specialists from our superb Fed staff.”

Why rates didn’t change: The Fed was not expected to move rates due to rising inflation and strong labor numbers from May. It was the fourth straight meeting for rates to stay the same.

“Economic activity is expanding at a solid pace despite elevated uncertainty that owes in part to the conflict in the Middle East,” Warsh presented in a statement. “Productivity growth and capital investment, both strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”

Looking into the future: FOMC participants, aside from Warsh, gave their projections of various economic factors through the end of the year and into the future. 

“As they submitted their forecasts, to be clear, they weren't [saying] this was more likely than not,” Warsh said. “This was more likely than their other scenarios. So I didn't hear tons of conviction. What I heard was the kind of humility that I think we should have.”

What they’re saying: Cox Automotive Chief Economist Jeremy Robb noted the Fed’s action was not a surprise, though their unanimous vote was.

“I think that tells us the FOMC members are telling us that they are worried about inflation and the path of that, and there’s a clear chance the next move ‘could’ be a hike if they feel they need to in response to inflation trends,” Robb said.

“In the statement of projections, there’s a clear bias to seeing a higher fed funds rate.”

Look at current auto rates: Finance rates for auto loans remain elevated. In May, Cox Automotive data shows new-vehicle loan rates at 9.85% and used rates at 12.33%.

Though rates remain high, approval rates are rising. Cox Automotive noted that loan rates in May hit 72.4%, up from 70.6% in April. Consumers are spreading out loans, with the number of loans at 72 months or more reaching 30% in May. 

Cox Automotive did note that vehicle affordability improved in May due to several factors.

Takeaway for dealers: The Fed decision will likely mean auto rates will stay steady, according to Robb. But a reversal of gas prices in recent weeks to closer to $4 after hitting more than $4.50 could help stem the tide of inflation.