Facing an uncertain economic environment that threatens to undermine demand for retail sales, including new vehicles, the Federal Reserve Board voted to cut interest rates. But it’s far from clear whether that will be enough to head off an automotive downturn many fear is being touched off by Trump administration policies, including tariffs on imported autos and auto parts. More from Headlight.News.
Federal Reserve Chair Jerome Powell.
The Federal Reserve this week voted to reduce interest rates by a quarter point. That follows up on the demand by Pres. Donald Trump – but falls short of the target he had set. And analysts worry the cuts may not reach consumers for a while due to factors beyond the control of the Federal Reserve Board.
Cox Automotive analysts noted interest rates on automotive loans actually moved higher after the Fed’s decisions to cut its benchmark funds rate by a .25% or 250 basis points. The actual rates paid by consumers on instruments such as car loans and mortgages are set by the independent bond market, which has been immune to the pressure from President Donald Trump, who has campaigned for lower rates.
If anything, the bond market is signaling it expects a combination of slower growth and higher inflation, driving up, factors that could further drive up the cost of borrowing. Further complicating matters for the auto industry: automakers appear ready to start passing on the cost of Trump tariffs on imported autos and auto parts. Most manufacturers have, at least until now, swallowed most or all of those tariff costs.
Fed flags concerns about the economy
So far, the Fed rate cut hasn’t been seen at dealerships where loan rates have actually gone up.
The policy statement and commentary from Fed Chair Jerome Powell after the meeting emphasized downside employment risks, according to Cox analysts. Subsequent information released by the Fed explaining the decision, along with updated economic forecasts reflect divided views of the economy by the Fed governing board members.
For those hoping to see auto lenders follow the Fed’s lead, the initial response has raised concerns. Auto loan rates have moved in the opposite direction in September. The average new rate has increased 34 basis points to 9.43%, which is up 75 BPs year to date – though down 14 BPs year over year. The average used vehicle loan rate in September has increased 22 BPs to 14.15% and is up 70 BPs year to date and 18 BPs year over year.
Auto sales, while holding steady this year, are expected to slow during the fourth quarter, reflecting tariff-driven pricing, the end of federal tax credits for EVs as of September 30, and broader economic issues, according to various analysts.
Sales are expected to slow
Even American-made vehicles face higher production costs due to tariffs.
Automakers have been hoping for help from the Federal Reserve as thy face increasing pushback from inflation-weary car buyers. New vehicle prices averaged just under $50,000 in August, according to Cox and other tracking services and, with tariffs adding thousands to the cost of producing or importing new vehicles, the trendline continues pointing upwards. High loan costs have made things even more difficult for buyers.
Cox noted what is driving up rates for car loans during September is a decline in financing incentives, which is a function of tighter new vehicle supply. In the used-vehicle market, the higher rates are due to a small move higher only in subprime rates, combined with volume growth in subprime loans.
But with higher rates, demand may be more challenged in September and the fourth quarter than in July and August, Cox added.
“The updated forecasts show that the Fed is expecting slightly stronger economic growth this year and next year, with slightly higher inflation and slightly lower unemployment in 2026. While the median expectation has increased to two additional rate cuts in 2025, nearly half of (the Fed’s) voting members see only one or no additional cuts in 2025,” Cox observed in its analysis.
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Challenges facing Fed
In his remarks after the meeting, Powell said, “When the dual goals of the Fed are in tension—with risks to inflation tilted to the upside and risks to employment to the downside—the situation is challenging and the path forward is unclear.”
The median expectation of economic growth in 2025 increased to 1.6% from 1.4%, while the median unemployment rate expectation was steady at 4.5% and the median forecast for inflation was steady at 3.1%, according to the Fed’s analysis.
The Fed Funds Rate is now 4.00-4.25%, which is widely considered to be restrictive, meaning that there is room for additional cuts if risks to the labor market persist.
The 10-year U.S. Treasury bond moved 4 basis points higher Thursday to 4.07, putting some upward pressure on consumer loans.. After today’s increase, the 10-year rate has fallen 16 basis points in September and is now down 50 basis points for the year. The average mortgage rate has fallen 35 basis points in September and is now down 92 basis points this year.
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