- The Federal Reserve held its benchmark interest rate steady in a meeting last week.
- Loan conditions have been good for car shoppers in recent months, but there’s widespread disagreement on what to expect later this year.
The Federal Reserve left interest rates unchanged at its meeting last week, suggesting little change is in store for a car market characterized by high prices but relatively easy credit.
The average new car sold for $49,353 in February, 3.4% higher than prices in February 2025. New-car shoppers are facing historic affordability challenges, with automakers trimming low-priced models from their lineups and focusing on high-margin trucks and SUVs.
But the credit market has been relatively good for shoppers, with more than 70% of applicants approved and lenders accepting lower down payments than a year ago.
The Fed’s move will make no immediate change in those conditions.
Explaining the Fed
- The Federal Reserve is a quasi-governmental agency composed of financial experts.
- Focused on keeping prices stable and unemployment low, they control an interest rate that ripples through the entire economy.
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” consists of 11 financial experts appointed by the president and confirmed by the Senate. They serve 14-year terms to isolate them from overt political influence from the White House.
The board sets a single interest rate – what banks charge each other for overnight loans. That interest rate serves as a throttle on the entire economy because banks use it to calculate the rates they’ll charge for loans and credit cards.
The Fed has often been uncontroversial, but has been operating under political tension through President Trump’s second term. The president has sought to fire a member, and is awaiting a Supreme Court ruling on whether he has that authority. He has also sought an investigation into the current chair, Jerome Powell, which faces similar legal questions.
Powell’s term expires in May, with Trump set to appoint a replacement regardless of the outcome of the other disputes.
Future Moves in Question
- The board released a forecast of its future moves, suggesting a possible rate cut later this year.
- Despite that, many observers think a rate increase is possible with the economic effects of the Iran war just beginning to unfold.
When the board makes a rate decision, it often releases a prediction of its future actions, the so-called “dot plot.”
CNBC reports that the plot “pointed to one reduction this year and another in 2027, though the timing remains unclear.”
However, many observers expect a pivot. Reuters notes, “Market pricing for a U.S. Federal Reserve interest-rate hike this year has shot up, and is now seen as far more likely than a rate cut. On Friday, interest-rate futures were pricing around a 25% chance of a rate hike by December, based on the CME FedWatch tool.”
One reason for uncertainty? The war in the Middle East. CNBC explains, “The fighting and its impact on the Strait of Hormuz has roiled the global oil market and threatened to keep inflation above the Fed’s 2% target.”
In a news conference discussing this month’s decision, Powell told reporters it’s “too soon to know” how the war will impact prices, but cautioned, “Near-term measures of inflation expectations have risen in recent weeks.”
