Fed Stays the Course and Cuts Additional Quarter Point

The Federal Reserve stuck to the plan of cutting 25 BPs (basis points) to continue the process of moving rates away from a too-restrictive level that has contributed to lackluster retail vehicle demand of late. There is no doubt: High rates – and limited affordability – held back new-vehicle sales in 2024. It was the first year since 2019 without supply limitations and was backed by a generally positive economy, and the market still failed to exceed the long-term sales average.

Though small, the cut announced today was an important signal that the Fed will be data-driven and recognizes that deterioration in the labor market this year demands focus while inflation continues to moderate closer to the target.

The decision was unanimous by the Federal Open Market Committee.

While many economists and market analysts think that President-Elect Trump’s campaign rhetoric could lead to higher inflation if fully implemented, we are months away from seeing substantial changes enacted by the new administration that could affect the economy.

The Fed is likely to cut another quarter-point in December. The path after that is a little less certain. A full-point decline across 2025 is still the most likely path, which would bring the Fed Funds Rate down 2 full points from its peak and make rate levels far less restrictive.

It is too early in the process to look much further than the next six months on the rate path, as much will depend on how the economy plays out and how policy actions in a second Trump administration influence inflation. Additionally, we still do not know which party will control the House of Representatives.

Beyond the next several months, interest rates may not decline as aggressively if we see policy changes that stoke inflation and work against the Fed. However, we have a chance to see lower rates over the next 6 months regardless of what happens with inflation and the Fed’s response to it if the economy stabilizes and loan performance improves. That is two big “ifs.”

Auto loan rates to start November are down 30 BPs year over year for new vehicles and down 55 BPs for used vehicles. This is the third month in a row that rates are down on a year-over-year basis. We are seeing a bit more aggressiveness in used auto loan rates to start November, following little change observed in September and October.

Many lenders have room to cut yield spreads by about a point just to get back to average – in other words, they can get more aggressive on rate without really being aggressive. Lenders will be willing to do that if they feel better about the economy and loan performance. In addition, captives have room for incentive growth relative to vehicle prices. They have been remarkably disciplined so far this year with financing offers, but I suspect that may change soon.

I expect the best time for lower rates will be by the spring. Loan performance should improve by then and the Fed will likely have lowered another 50 BPs. As a result, consumers could see 1-1.5 points of further improvement, more on used vehicles and more on captive new-vehicle deals.

I suspect some lenders will be willing to get aggressive before year-end. We will be keeping a sharp eye on rate trends and incentives. Captives and auto-focused finance companies will likely be the first to move aggressively.

Average auto loan rates are already down 50 BPs for new-vehicle loans and 90 BPs on used-vehicle loans from peaks earlier this year. Add expected declines from the peaks by the spring, and the average monthly payment could be down as much as 10%.

However, rates are not the only factor that will be changing to influence consumer interest and urgency to buy. In the months ahead, we may be traveling down a familiar path, one we traveled in 2018 when trade negotiations kicked into high gear. If consumers worry that prices could be higher in a few months and choices more limited – thanks to tariffs and the possibility of a trade war – it will change their urgency to buy sooner rather than later.

Jonathan Smoke

Chief Economist

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.