Economists Unsure of Rate Cut’s Effect on Auto Finance

By Ted Craig August 02, 2019

The recent quarter-point cut from the Federal Reserve is expected to help the used-car market by boosting the economy in general and making financing more affordable.

The Federal Reserve lowered its federal funds rate to a range of 2 percent to 2.25 percent.

“These rate cuts will help the economy, said Tom Kontos, chief economist for KAR Auction Services Inc.

“New- and used-vehicle sales and wholesale used vehicle prices will all benefit. In fact, lower payments in a payment-driven industry like automotive are always helpful.”

Kontos said he was comfortable with the Fed holding interest rates, but he sees this as an “insurance move” to support continued economic growth.

Cox Automotive chief economist Jonathan Smoke said it was hard to predict where consumers rates would head after the cut. Smoke expects a moderate impact on auto finance, but less than other forms of finance.

Smoke explains that auto creditors have been risk averse all year and are unlikely to lower their finance rates by much. This has been especially true for subprime finance.

He did say auto finance rates have room to decline, but that will depend on risk tolerance.

Even if new-vehicle finance rates come down with the cut, Smoke said, it won’t be enough to boost sales since new-vehicle prices remain at historically high levels.

There is still good news for dealers, Smoke said.

“The biggest immediate beneficiary of lower short-term interest rates in the auto industry will be dealers, as they should see an immediate reduction in the interest expenses, they pay for carrying inventory and for capital for infrastructure investments,” he said. “Dealers saw investment expense rise with each Fed increase last year, and they have been contending with a perfect storm of higher costs across every major expense from inventory to interest to labor.

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Last modified on Friday, 02 August 2019 18:58

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