The first rate hike in three years by the Federal Reserve may not directly affect finance rates or auto sales today, but the growing likelihood of elevated rates for an extended period could slow shopping.
Driving the news: In reaction to lingering inflation, the Federal Open Market Committee voted 12-0 Wednesday to increase the federal target rate by a quarter percent.
In their economic projections, the consensus of the committee was for there to be one more hike before the end of the year to 4.1%.
The committee also expects the rates to stay at that level for all of 2027.
Auto affordability decreases: Even before the Fed’s action, new-vehicle affordability dipped in August, in the latest Cox Automotive/Moody’s Analytics Vehicle Affordability Index.
The average transaction price reported by Kelley Blue Book increased 0.5% from July to $50,090.
The price increase negated the income growth increase of 0.3% and the 0.2% interest rate decrease that left the average rate at 9.49%, with payments at $770.
Compared to August 2025, affordability improved 1.2%.
Compared rates: Auto rates currently range widely, with Bankrate’s weekly survey putting the average at 7% for a 60-month loan.
Edmunds’ August report put rates at 7% for new vehicles and 10.6% on used vehicle loans.
And an updated Dealertrack’s report shows rates at 9.93% for new vehicles and 14.03% on used loans.
The federal target rate hike is not expected to be immediately passed through to new loans, noted Moody's economist Carlos Garcia to CDG News.
“For auto loan rates, the impact is unlikely to be one-for-one. Auto loans are influenced by both the federal funds rate and longer-term Treasury yields, particularly the 10-year Treasury,” Garcia explained. “So while a higher Fed path creates upward pressure on financing costs, lender spreads can, and have, offset some of that effect. We have already seen periods where Treasury yields increased, but auto loan rates changed only modestly.“
Elevated for longer: Garcia added that the immediate hike is not as big of a headwind to the industry as the projections for another hike and for rates to stay "higher-for-longer."
"The key question is not [Wednesday's] hike but whether lenders and consumers come to expect elevated borrowing costs for an extended period," Garcia said. “...if markets fully embrace the Fed's higher-for-longer outlook, borrowers should expect rate relief to come more slowly than previously anticipated.”
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Other economic impacts: The labor market has remained strong with unemployment around 4.1%.
But fuel prices remain elevated, hitting $4.43, up $1 year-over-year and just 13 cents off the high for the year in May, according to AAA.
Garcia pointed out that, though current projections don’t signal a recession, some borrowers, especially subprime customers, could struggle with higher payments and to qualify for loans.
Cox Automotive’s recent access to credit report showed subprime originations were at a 16.6% share in August.
“The biggest risk for auto sales would be if higher rates are accompanied by a softer labor market,” Garcia said. “Elevated borrowing costs by themselves are manageable for many consumers, but if they coincide with weaker hiring, lower confidence, or tighter credit standards, the effect on vehicle demand could become more pronounced. For now, the Fed's projections suggest slower rate relief and continued affordability pressure rather than a dramatic change in sales volumes.”
Incentives available: To help push demand, several OEMs have been offering incentives on financing.
Chevrolet, GMC, Hyundai, Kia, Mazda, Jeep, Ram, and Subaru were among brands offering 0% financing incentives on select models at the start of September, according to CARFAX research.
Even more brands were offering terms between 0.9% and 5% on terms of 48 or 72 months depending on models.
“I would not expect OEMs and their captives to broadly pull back on incentives,” Garcia said. “More likely, support will become increasingly targeted toward models where inventory is building, or demand is softer. In these cases, captives may favor promotional APRs over larger cash discounts. With market loan rates remaining elevated, subsidized financing can address the monthly-payment constraint more directly and may be more effective at bringing buyers into the market.”
Bottom line: For dealers, demand should remain steady, but buyers will be paying even closer attention to the monthly payment, Garcia noted.
"The Fed’s higher-for-longer outlook is unlikely to cause an abrupt drop in sales on its own, but will keep affordability under pressure and may cause financing-dependent consumers to take longer to make a purchase," Garcia said.
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