- The Federal Reserve held interest rates steady yesterday ahead of a contentious election.
- The move means little change for car shoppers, but they could use some change.
The U.S. Federal Reserve left its benchmark interest rate unchanged yesterday despite some pressure to raise it. The move keeps credit conditions essentially unchanged for car shoppers, but Fed observers expect a rate increase at the board’s next meeting in December.
Explaining the Fed
- The Federal Reserve is an independent body of financial experts who set an interest rate that indirectly accelerates or brakes much of the economy.
The media calls it “the Fed,” but the formal name of the board is the Federal Open Market Committee of the U.S. Federal Reserve. It has significant influence on Americans’ finances.
It’s a board of financial experts appointed by the President and confirmed by the Senate. They serve 14-year terms intended to insulate them from politics because they outlast the terms of the people who appointed or confirmed them.
Their most important job is to control a single interest rate — the rate on overnight loans between banks — that works like a pressure valve on the entire U.S. economy. Banks use that rate to calculate loan and credit card rates.
Raising it makes borrowing more expensive, which can slow spending and hiring and ease inflation. Decreasing it makes borrowing easier, which can increase spending and hiring, but risks inflation.
Fed members speak often of their “dual mandate” to keep inflation in check and unemployment low — a tricky balance even in quiet times. With the country at war and headed into a pivotal election, that balance may be unmanageably difficult.
For Car Shoppers, Borrowing is Easy and Expensive Today
- It’s historically easy to qualify for a new car loan right now.
- But that loan may be long and expensive, especially when used for a pricey car.
Car shoppers are facing high prices, high interest rates, and easy access to long, expensive loans this year.
Related: Average New Car Price Nears All-Time High
Jeremy Robb, chief economist for Kelley Blue Book’s parent company, Cox Automotive, explains, “Compared with 2019, interest expense over the life of a typical vehicle loan is up nearly 80% for a new vehicle and almost 100% for a used vehicle.”
A Fed rate increase, he said, “would only add to that challenge, but a pause alone is unlikely to provide meaningful relief to auto loan rates, which have been trending higher in October largely because of higher bond yields and general market uncertainty.”
Instead, the Fed is widely expected to raise rates in December. The New York Times speculates that this month’s decision “centered around a belief that the Fed had the flexibility to gather more information about the state of the economy and the inflation problem it is trying to vanquish before raising rates again, as it is widely expected to do at its final gathering of the year in December.”
Lenders are still approving nearly three-quarters of all loan applications — near historic highs. But high new-car prices mean nearly 6 in 10 borrowers now roll negative equity from an old loan into a new one, and nearly a third of buyers choose a loan of 72 months or longer.
