Auto interest rates aren’t likely to climb until next year, when the Federal Reserve stops buying bonds, according to a report by Automotive News that cited a Cox Automotive economist.
The Fed had been purchasing $80 billion in Treasury bonds and $40 billion in home loans monthly. But last week, the central bank said it would purchase $10 billion fewer Treasury bonds and $5 billion fewer bundles of mortgages each month, starting in November. This practice will remain in place through at least December, when the Fed would be down to buying $60 billion in government debt and $30 billion in mortgages, but likely run longer, the Fed said.
Cox Automotive Chief Economist Jonathan Smoke said Thursday the Fed’s actions indicated “rates are going to continue to be very favorable to the auto market.” In fact, Smoke said he wasn’t yet prepared to say auto rates had reached a floor.
The federal funds rate will remain at 0-0.25 percent until employment improves and inflation consistently exceeds 2 percent, the Fed said.
The Fed cut the federal funds rate to that level and started buying additional Treasury and mortgage bonds in March 2020 as a response to the COVID-19 pandemic.
Both the federal funds rate and the Fed’s bond purchasing have a ripple effect upon auto loan interest rates, according to Warren Kornfeld, senior vice president in Moody’s Financial Institutions Group.
The easier it is to borrow money or sell off loans on one’s own books, the more room lenders have to finance additional vehicles at lower interest rates.