The Federal Reserve Open Market Committee on Wednesday opted to maintain its benchmark interest rate for more than another month, denying relief to auto dealerships challenged by higher interest rates but not exacerbating the issue with a rate hike despite inflation running hotter than the Fed likes.
The federal funds rate target, which can have a ripple effect on the interest rates auto lenders charge consumers, will remain at the 5.25-5.5 percent level put in place in late July 2023, the central bank announced Wednesday. The next Fed open market meeting on rates is scheduled from April 30 to May 1.
The average interest rate on auto loans for new vehicles was 7.2 percent in the fourth quarter of 2023, up from 6.1 percent a year earlier, according to Experian. The average used-vehicle auto loan charged 11.9 percent, up from 10.4 percent a year earlier.
Inflation still remains above the 2 percent target the Fed wants to see long-term from the Bureau of Economic Analysis’ consumption index. The Fed watches this inflation metric over the Bureau of Labor Statistics’ consumer price index.
Prices rose 2.4 percent year over year in January in the Fed’s preferred index, according to the latest month with Bureau of Economic Analysis data publicly available. They rose 3.2 percent year over year in the Bureau of Labor Statistics’ February consumer price index.
Michele Raneri, TransUnion vice president of U.S. research and consulting, said Monday prior to the Fed announcement it appeared potential interest rate decreases wouldn’t arise until later in the year.
“This means U.S. consumers who continue to face relatively high interest rates across a range of credit products will likely have to wait at least a bit longer for rate relief,” she said in a statement. “When rates do begin falling, the effects throughout the credit industry will be real but will likely be slow to take root.”
Cox Automotive Chief Economist Jonathan Smoke told Automotive News anticipation of future rate cuts hurts today’s auto market.
“It sends a clear message that, ‘You need to wait because rates are going to be lower later in the year,’ ” he said March 12. “So it takes a lot of urgency out of thinking of buying right now.”
Interest rates were the No. 1 challenge for franchised dealers during the first quarter, according to the latest Cox Dealer Sentiment Index survey. The study ran from Jan. 30 to Feb. 13 and received responses from 546 franchised dealers and 472 independents.
“The cost of borrowing money is very, very high,” a Hyundai dealer in the West told Cox. “Interest rates are very high. Income has not increased with the rate of price increases for products.”
Seventy percent of the franchised dealers said interest rates were hindering their business, down from 73 percent during the fourth quarter of 2023.
“Everything is costing so much more, rates are not going down,” a Chevrolet dealer in the Midwest told Cox. “[It’s] hard for people to qualify for a good rate.”
The economy was the No. 2 concern, challenging 51 percent of the franchisees. Market conditions came in third at 38 percent.
“Inflation and cost of living has increased, and customers are really using their money wisely,” a Subaru dealer in the Midwest told Cox. “If their car can make it another few years, they will go down that path.”