Smoke on Cars
The Federal Reserve Fades into the Background as Other Factors Take Center Stage
Wednesday December 18, 2024
The Fed confirmed today that they have stuck to the plan of cutting another quarter point in the Fed Funds Rate, but their outlook for additional cuts was scaled back. Rate policy is now expected to move only a half point in 2025, which is half of what they projected just three months ago.
This cut serves as an important signal that the Fed is data-driven and is not adjusting plans based purely on speculation of possible policy changes from the Trump administration. However, their reduced rate cut plans signal that perceived risks are changing. The decision was not unanimous by the Fed’s Open Market Committee, as one governor voted not to cut.
Importantly, the announcement today also signals that the Fed is fading into the background while other factors take center stage for the economy and the auto market.
While many economists and market analysts believe that President-Elect Trump’s ideas and plans could lead to increasing inflation if enacted, we are months away from seeing new policies that could affect the economy in any material way.
After a full percentage point rate cut in the final three months of 2024, the path for rate policy from here is more uncertain and likely less dramatic. Updated projections from the Fed indicate that another half point in cuts in 2025 is the most likely path, which would bring the Fed Funds Rate down by 1.5 percentage points from its peak but would still keep rates in restrictive territory.
Beyond next year, they see a possible half point in cuts in 2026 and another quarter in 2027 to get us to a neutral, non-restrictive level of rate policy. That’s a long time from now, with plenty of political twists and turns that will likely change the roadmap.
Updated Fed economic projections indicate that the Open Market Committee members expect stubborn inflation and a stabilizing labor market in 2025.
Fed policy will likely be less important in 2025 than in recent years. Auto loan rates could decline without any change by the Fed if the economy stabilizes as expected and loan performance improves.
Lender confidence in the economy and in future used vehicle value trends, along with lower auto loan delinquencies, could see more aggressiveness by lenders that would reduce yield spreads, which is the premium charged by lenders to compensate them for risk. Many lenders have room to cut yield spreads by 50-to-100 basis points just to get back to average.
Auto loan rates so far in December are down slightly from November for new vehicle loans but are up slightly for used vehicle loans. Year over year, both types of loans see average rates that are down, and rates on both are down about a full percentage point from the 24-year highs reached earlier this year.
That change in rates reduces monthly payments by approximately 3%. Affordability has improved for consumers due to the combination of these rate reductions, lower prices on used vehicles, higher incentives on new vehicles, and strong income growth.
We expect that consumers may see even lower rates by spring, which would create the most normal and favorable buying environment since 2019.
The path for auto loan rates after the spring is more uncertain. New tax and fiscal policy, new tariffs, and reduced immigration could lead to increases in inflation. It is, therefore, possible that rates could move higher in the second half of 2025 after declining in the first half.
Prices may also have a less favorable path in 2025. In the months ahead, we are likely to see more tariff threats and actions. Even if tariffs do not come to fruition, demand could surge, driving prices higher ahead of possible tariff-related increases.
In 2025, when it comes to news that impacts the auto business, we’re expecting more influence to come from the halls of Congress and the Oval Office and less from what is decided in the Board Room of the Federal Reserve. We, for one, are glad to see the Fed move off center stage.
Jonathan Smoke
Jonathan Smoke leads Cox Automotive’s economic and industry insights team, which tracks key metrics and trends impacting both the wholesale and retail markets for vehicles informed by the proprietary data from the company’s businesses and platforms. For 28 years, Smoke has focused on translating data and trends into relevant actionable insights for the industries that represent the biggest purchases that consumers make in their lifetimes: real estate and automotive. Smoke joined Cox Automotive in 2017.