Fed Move Puts More Pressure on Auto Finance Featured

By Ted Craig December 20, 2018

 

 

 

The Federal Reserve increased its federal funds rate on Dec. 19, placing more pressure on auto finance.

The rate moved to 2.5 from 2.25.

Many creditors announced they would immediately follow suit. For example, Huntington Bancshares Inc, said it would raise its prime rate to 5.5 percent from 5.25 percent.

The move makes the affordability of new cars are even bigger issue for consumers.

Cox Automotive Chief Economist Jonathan Smoke points out that auto finance rates are already at a seven-year high.

“The era of low auto loan rates is clearly behind us,” Smoke said. “That means that the payment becomes even more front and center to the car buying experience. Negotiating the payment is ironically the part of the buying process that consumers dislike the most and want to change.”

Federal Reserve Chairman Jerome Powell has signaled the Fed might slow its rate of increases next year.

KAR Auction Services Inc. Chief Economist Tom Kontos said he was expecting a quarter-point increase each quarter, but now forecasts just one or two.

Smoke said even one increase of 25 basis points will put auto finance rates in the range last seen in early 2011.

One positive of the increases is they can spur sales.

“It doesn’t really pay to wait,” said Charlie Chesbrough, senior economist at Cox Automotive.

Higher rates also mean more consumers might opt for used vehicles instead of new.

How the Fed moves forward is complicated. If it acts too quickly, it can crash the economy, but acting too slowly risks skyrocketing inflation and leaves it with little room to maneuver in case of a downturn.

“It’s both an art and a science,” said George Hoffer, professor emeritus of economics at Virginia Commonwealth University.

Last modified on Thursday, 20 December 2018 17:18

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