- The Federal Reserve cut its benchmark interest rate by a quarter of a point yesterday
- The move may take a few months to reach consumers, but loan conditions are good for most this month
The U.S. Federal Reserve cut its benchmark interest rate by a quarter of a point yesterday. The move is unlikely to impact car shoppers for months, but loan conditions are generally favorable for them this month.
Related: Is Now the Time to Buy, Sell, or Trade-In a Car?
Cox Automotive Interim Chief Economist Jeremy Robb explains, “Because the Fed’s primary policy tool operates with a lag, material auto-loan relief will likely come in the spring or later, not before the holidays, regardless of what a divided board of Fed governors decides this week.”
Cox Automotive is the parent company of Kelley Blue Book.
Explaining the Fed
- The Federal Reserve, a quasi-government agency, sets the interest rate for overnight loans between banks
- That rate then affects the rates lenders charge for all types of credit
A committee of financial experts regularly adjusts the rate for overnight loans between banks. That rate then feeds into how banks decide interest rates on loans and credit cards for you and me.
Economists tend to call that committee “the Fed,” but its formal name is the Federal Open Market Committee of the U.S. Federal Reserve. The president appoints members, and Congress confirms them. Once Fed members are in their seats for 14-year terms, they have complete independence and don’t answer to any branch of government.
Fed members are fond of saying they have a “dual mandate” — a charge to keep unemployment low and prices stable. They traditionally have independence from political branches of the government on the theory that they should take a long-term view of both, while presidents might prefer short-term decisions.
The Fed has been operating under extraordinary conditions this year, as President Donald Trump has attempted the unprecedented move of firing a board member mid-term. The Supreme Court has said that member Lisa Cook can remain in her seat while it waits to hear arguments on whether that’s allowed next year.
The board also had limited information to act on this month. A recent federal shutdown meant that some federal agencies didn’t report data they usually provide to the board. Fed Chair Jerome Powell even took the historically unprecedented step this week of questioning whether the data they did provide can be trusted.
Fed decisions are usually unanimous. But in this tense climate, the board was more divided than usual. Some members voted for a deeper cut, and some for no cut at all.
Why Cuts Will Have Limited Impact
- Loan conditions are already good for most car shoppers
- Lenders are more concerned with employment levels than the Fed this winter
The news is good for shoppers, Robb says, but has limited effect.
“With recency bias front and center, auto lenders remain more focused on consumer risk and employment levels than on the Fed rates,” he explains.
Lenders approved more loans in November than in October, and at slightly more advantageous rates for borrowers.
But the loan climate remains uncertain, Robb says. “The dual mandate has never looked more complicated: AI infrastructure spending continues to prop up headline GDP, but the K-shaped recovery now extends beyond consumers to businesses themselves.”
Economists use the term “K-shaped recovery” when the economy is improving for wealthy consumers, but not for the average American.
“Large corporations are absorbing tariff pressures and maintaining investment capacity, while small businesses struggle with both,” he adds.
The rate cut is likely to filter down to consumer auto loans in two to three months, but not before. Amid political turmoil, a lot could change by then.
But the holidays are traditionally a strong time for car sales. As they approach, loan conditions remain fairly good for American consumers.
