Fed Affirms Continued Low Rates, but in the Near Term Consumers Aren’t Seeing Lower Rates

Today’s Fed announcement was not about current rate levels, which remain near zero, but about expectations for the economy, guidance on rates long term, and elaboration on what it will take to shift away from low rates when the time comes.

A key phrase in their announcement was “…the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” The Fed’s released forecasts do not see inflation exceeding 2% in their forecast horizon through 2023. As such, rate policy is expected to remain where it is – near zero – through 2023.

In addition to rate policy, the Fed will continue to buy Treasuries and mortgage backed securities to keep longer rates low, especially on mortgages.

Fed Chairman Jerome Powell acknowledged that economic activity has picked up and household spending has recovered about 75% but was likely supported by stimulus payments and enhanced unemployment benefits. Even though the progress has been better than originally forecasted, Powell said that the path ahead looks highly uncertain.

Treasury yields barely moved today in reaction. Yields remain near but not quite at historic lows.

Consumer rates on mortgages and most auto loans are edging higher despite what is happening with monetary policy. Average rates remain lower than they were in February, but real rates consumers see have been increasing in recent weeks in response to higher risk.

Looking at new auto loan originations, auto credit has tightened since April. While credit remains widely available, the composition of credit has been shifting toward higher credit tiers as lenders tighten standards and become more selective in which loan applications they approve. Likewise, even those with higher credit scores are seeing slightly higher rates and less beneficial terms than were the case back in April and May.

Data from the Mortgage Bankers Association suggests a similar trend is at play in mortgages, with credit conditions at the tightest level in 6.5 years.

The Fed intends to keep rates low for a longer period of time and even accept higher inflation as long as unemployment remains elevated. However, the data clearly show that these low rates are not accessible to everyone. Furthermore, as fiscal stimulus fades while unemployment remains high, loan performance is likely to deteriorate leading to even further tightening at least in the short term as the economic direction remains uncertain.

Such credit tightening will lead to modestly higher, not lower loan rates. In addition, unlike in the mortgage market, the Fed is not buying auto asset backed securities, so the Fed has even less influence on rates on loans in the auto market.

The Fed’s actions are about supporting the economy and ensuring we continue to see recovery in the labor market. However, that recovery will take some time. The near-term does not look tempting for the average car buyer. Higher rates, less generous terms, and record-high new and used vehicle prices combine to mean record finance payments on purchases. Despite the actions from the Fed, this autumn is not a great time to finance a vehicle unless you have stellar credit.