A couple of economists who track the U.S. auto industry aren’t complaining, exactly, about the Federal Reserve cutting interest rates last week, but they’re not rejoicing, either.
That’s because consumers shouldn’t expect any immediate, significant reduction in retail auto loan rates because of the Fed actions, analysts said. Affordability remains a problem, especially since so many customers are switching to bigger, more expensive trucks, and because automakers are determined to keep a lid on discounting.
“What it may mean for autos is, all things being equal, if you lower rates a couple times … that’s a good thing for new-auto sales,” said Tom Kontos, chief economist for KAR Auction Services Inc., a wholesale, used-vehicle auction firm. In time, rate cuts should also help make used-vehicle financing more affordable, he said in a phone interview on Sept. 23.
U.S. Federal Reserve Chairman Jerome Powell announces the latest interest-rate cut.
Xinhua News Agency/Getty Images
However, Kontos said the timing of the quarter-point reduction in rates on Sept. 18 was unusual because in his opinion, by historical standards there aren’t that many signs of an imminent recession, when rate cuts could be expected.
In addition, there’s the worry that with rates already relatively low, the Fed won’t have much room to cut rates even more, if and when a recession does become imminent, Kontos said.
“As an economist, this is another case where it’s unusual to me the Fed would be sort of using its ammo up for averting a recession, when there’s very few warning signs of an imminent recession,” he said. “Usually, there’s more indication.”
U.S. financial markets and the auto industry are “nervous,” but that’s primarily because of trade tensions and because of today’s political volatility — and not particularly because of interest rates, Kontos said. The Fed announced an identical quarter-point reduction July 31. That was the first time the Fed reduced its benchmark rate target since 2008.
Separately Jonathan Smoke, chief economist for Cox Automotive, said the rate cuts so far this year “likely won’t influence” auto-loan rates. “Short-term rate policy does not directly impact longer-term rates on consumer loans like mortgages and vehicle loans,” he said in a blog last week.
“The Fed’s prior action to cut rates and stop quantitative tightening didn’t help the auto market last month, but their actions didn’t hurt it either,” Smoke said in the blog. “Time will tell if this additional rate reduction will actually materialize into real, observed rates on auto loans.”
