Editor’s note: This story was updated at 5:02 p.m. on Sept. 16.
Interest rates are rising for the first time since 2023, with the Federal Open Market Committee (FOMC) announcing Wednesday its new target range for rates at 3.75% to 4%.
Future projections by the FOMC indicate more hikes could be on the way before the end of the year, meaning no relief is expected on auto loan rates soon.
Driving the news: The Federal Reserve has held rates steady since January, but stubborn inflation just forced the FOMC to act.
The Bureau of Labor Statistics in September estimated the annual inflation rate at 3.4%, with fuel prices spiking during the war in the Middle East.
Federal Reserve Chairman Kevin Warsh, during his press conference Wednesday (Sept. 16), stated more recent data put the inflation rate closer to 3.6%.
He said too many categories [are] “still posting increases over 3% on both the 6- and 12-month basis.”
“Job gains have kept pace with the workforce, and the unemployment rate has changed little,” Warsh said. “But inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2% goal. This Committee will deliver price stability.”
Health of economy: Warsh pointed to the labor market as a sign of strength in the economy.
The unemployment rate remains around 4.1%.
Additionally, Warsh noted monthly unemployment claims are consistent with full employment.
“The labor side of the Fed's Congressional agreement is in good shape. Yet for more than five years inflation has been running above target. So our predominant focus is on the price stability side of our mandate,” Warsh said. “...The Fed has a role in sustaining the economic progress happening in America right now. In the rising opportunities that come with it. Those who are least well off have the most to gain from a durable expansion, a solid labor market, and stable prices.”
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Looking ahead: The FOMC submitted its future projections, with the consensus putting rates at 4.1% at the end of 2026.
The committee members expect rates to stay at 4.1% through 2027, though many individuals indicated they could see rates rise to as high as 4.4%.
Rates are not expected to drop until 2028.
Additionally, projections show inflation finally hitting the 2% target in 2029.
“Those are the forecasts of my 18 colleagues, and I tried to represent them dutifully to you,” Warsh said. “My business is to not give forward guidance, but my commitment in June [during the last long-range forecast] was to reaffirm to the American people, to anyone listening, that we will deliver price stability… Today's action starts to show we are serious about this. And we will deliver on the price stability objective.”
Auto rates impact: Auto rates were already well above the federal rate, with Cox Automotive data showing the average new rates at 9.78% and used rates at 13.99%.
Cox Automotive Chief Economist Jeremy Robb pointed out that, before the Fed’s decision, more recent days showed a small increase in new rates and used rates remaining steady.
Robb also noted that if lenders pass along the quarter-point hike, loans would see an increase of $6 for new and $4 for used, per month.
Bottom line: Outside of incentives from OEM captives, auto rates are expected to remain higher, and no material improvement is expected for the remainder of this year and into 2027.
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