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WASHINGTON (AP) — The Federal Reserve reinforced its fight against high inflation Wednesday by raising its key interest rate by a quarter-point to the highest level in 16 years. But the Fed also signaled that it may now pause the streak of 10 rate hikes that have made borrowing for consumers and businesses steadily more expensive.
In a statement after its latest policy meeting, the Fed removed a sentence from its previous statement that had said “some additional” rate hikes might be needed. It replaced it with language that said it will consider a range of factors in “determining the extent” to which future hikes might be needed.
The Fed’s rate increases since March 2022 have more than doubled mortgage rates, elevated the costs of auto loans, credit card borrowing and business loans and heightened the risk of a recession. Home sales have plunged as a result. The Fed’s latest move, which raised its benchmark rate to roughly 5.1%, could further increase borrowing costs.
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Still, the Fed’s statement offered little indication that its string of rate hikes have made significant progress toward its goal of cooling the economy, the job market and inflation. Inflation has fallen from a peak of 9.1% in June to 5% in March but remains well above the Fed’s 2% target rate.
“Inflation pressures continue to run high, and the process of getting getting inflation back down to 2% has a long way to go,” Chair Jerome Powell said at a news conference.
The surge in rates has contributed to the collapse of three large banks and turmoil in the banking industry. All three failed banks had bought long-term bonds that paid low rates and then rapidly lost value as the Fed sent rates higher.
The banking upheaval might have played a role in the Fed’s decision Wednesday to consider a pause. Powell had said in March that a cutback in lending by banks, to shore up their finances, could act as the equivalent of a quarter-point rate hike in slowing the economy.
Fed economists have estimated that tighter credit resulting from the bank failures will contribute to a “mild recession” later this year, thereby raising the pressure on the central bank to suspend its rate hikes.
The Fed is now also grappling with a standoff around the nation’s borrowing limit, which caps how much debt the government can issue. Congressional Republicans are demanding steep spending cuts as the price of agreeing to lift the nation’s borrowing cap.
![Federal Reserve](https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=150%2C100 150w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=200%2C133 200w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=225%2C150 225w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=300%2C200 300w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=400%2C267 400w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=540%2C360 540w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=640%2C427 640w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=750%2C500 750w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=990%2C660 990w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=1035%2C690 1035w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=1200%2C800 1200w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=1333%2C888 1333w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=1476%2C984 1476w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/b/84/b84285ef-ea29-5608-91a2-316882d7be9b/6452ab5c42f42.image.jpg?resize=1763%2C1175 2008w)
Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, Wednesday, May 3, 2023, following the Federal Open Market Committee meeting.
The Fed’s decision Wednesday came against an increasingly cloudy backdrop. The economy appears to be cooling, with consumer spending flat in February and March, indicating that many shoppers have grown cautious in the face of higher prices and borrowing costs. Manufacturing, too, is weakening.
Even the surprisingly resilient job market, which has kept the unemployment rate near 50-year lows for months, is showing cracks. Hiring has decelerated, job postings have declined and fewer people are quitting jobs for other, typically higher-paying positions.
The turmoil in the nation’s banking sector, which re-erupted last weekend as regulators seized and sold off First Republic Bank, has intensified the pressure on the economy. It was the second-largest U.S. bank failure ever and the third major banking collapse in the past six weeks. Investors have grown anxious about whether other regional banks may suffer from similar problems.
Goldman Sachs estimates that a widespread pullback in bank lending could cut U.S. growth by 0.4 percentage point this year. That could be enough to cause a recession. In December, the Fed projected growth of just 0.5% in 2023.
Wall Street traders were also unnerved by this week’s announcement from Treasury Secretary Janet Yellen that the nation could default on its debt as soon as June 1 unless Congress agrees to lift the debt limit, which caps how much the government can borrow. A first-ever default on the U.S. debt could potentially lead to a global financial crisis.
The Fed’s rate hike Wednesday comes as other major central banks are also tightening credit. European Central Bank President Christine Lagarde is expected to announce another interest rate increase Thursday, after inflation figures released Tuesday showed that price increases ticked up last month.
Consumer prices rose 7% in the 20 countries that use the euro currency in April from a year earlier, up from a 6.9% year-over-year increase in March.
In the United States, some major drivers of higher prices have stalled or started to reverse, causing slowdowns in overall inflation. The consumer price index rose 5% in March from a year earlier, sharply lower than its 9.1% peak in June.
The rise in rental costs has eased as more newly built apartments have come online. Gas and energy prices have fallen steadily. Food costs are moderating. Supply chain snarls are no longer blocking trade, thereby lowering the cost for new and used cars, furniture and appliances.
Still, while overall inflation has cooled, “core” inflation — which excludes volatile food and energy costs — has remained chronically high. According to the Fed’s preferred measure, core prices rose 4.6% in March from a year earlier, scarcely better than the 4.7% it reached in July.
Another Fed rate hike: How high will auto loan rates get?
Another Fed rate hike: How high will auto loan rates get?
![Another Fed rate hike: How high will auto loan rates get?](https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=150%2C107 150w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=200%2C143 200w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=225%2C160 225w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=300%2C214 300w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=400%2C285 400w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=540%2C385 540w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=640%2C456 640w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=750%2C535 750w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=990%2C706 990w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=1035%2C738 1035w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/a5/0a593625-5060-59ee-842d-a76549900c0c/643f329245cbe.image.jpg?resize=1080%2C770 1200w)
On March 22, the Federal Reserve announced another increase to the federal funds rate – this time, a hike of 25 points (0.25%). The move marks the ninth federal funds rate, or Fed rate, surge in the last year, bringing it up to 4.75-5.00%.
While politicians and economic analysts have begun to debate the necessity of these Fed rate hikes, an automotive industry already facing a crisis of affordability will have to deal with the impact of even higher annual percentage rates (APRs). With many wondering just how high auto loan rates might get, Automoblog took a closer look at economic indicators from the Federal Reserve and other sources to find when they may start to come back down.
Latest Fed rate hike pushes funds rate close to 20-year high
In mid-March of 2022, the federal funds rate sat at its lowest possible range of 0.00%-0.25%. A little more than one year later, that rate is inching towards its highest level in more than two decades.
The Fed began its current run of raising the interest rate with a 25 point hike on March 17, 2022, with the goal of tackling runaway inflation. At the time, the Consumer Pricing Index (CPI) – which measures inflation – was seeing an 8.5% increase. Increasing the cost of borrowing is a common tactic for attempting to temper the economy. Federal Reserve Chairman Jerome Powell said at the time, and has maintained since, that his goal is to get the inflation rate down to 2%.
A series of hikes
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Since the initial interest rate hike, there have been eight additional increases. Over that same time, inflation has dropped to around 6%. While that is still well above Powell’s stated goal of 2% inflation, the chairman is facing increasing scrutiny from politicians from both sides of the aisle in Washington.
At a hearing in early March, Senators Elizabeth Warren (D-MA) and John Kennedy (R-LA) were among several that grilled Powell. Both expressed concerns over a potential rise in unemployment resulting from increased borrowing rates. Later, Warren was critical of Powell and continued Fed rate hikes on “Meet the Press.”
“I do not think he should raise rates,” said Warren. “I’ve been in the camp for a long time that these extraordinary rate increases that he has taken on these extreme rate increases are something that he should not be doing.”
In the interview, Warren also said that she felt Powell “failed” as Federal Reserve Chairman.
Auto loan rates will likely go up again
![Auto loan rates will likely go up again](https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=150%2C100 150w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=200%2C133 200w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=225%2C150 225w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=300%2C200 300w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=400%2C267 400w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=540%2C360 540w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=640%2C427 640w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=750%2C500 750w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=990%2C660 990w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=1035%2C690 1035w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/0/ad/0ad601cb-52cd-520e-b6dc-a4f890c9b932/643f3296efb70.image.jpg?resize=1200%2C800 1200w)
As borrowing costs for institutional lenders have increased, they have caused a significant rise in consumer auto finance rates. In February 2022, just before the first of the recent Fed rate hikes, the average interest rate for a 60-month new car loan was 3.99%. Just one year later, that average has risen to 6.27% – a 57% increase.
Increases to consumer auto lending rates has been more or less in lock step with increases to the federal funds rate. That means that the most recent hike will likely push consumer rates even higher.
This comes at a time when high finance rates are already fanning the flames of an affordability crisis for the automotive industry. Along with supply chain issues that have increased prices, higher APRs have significantly increased the cost of buying a car. That’s pushed some buyers towards taking on longer loan terms with more interest costs, often into a state of negative equity. It’s also pushed others out of the market completely.
Another auto loan rate increase could exacerbate these trends by reducing consumer buying power. That would add even more cause for concern for an industry already facing uncertainty from multiple directions.
When is the next interest rate hike?
![When is the next interest rate hike?](https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=150%2C107 150w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=200%2C143 200w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=225%2C160 225w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=300%2C214 300w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=400%2C285 400w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=540%2C385 540w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=640%2C456 640w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=750%2C535 750w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=990%2C706 990w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=1035%2C738 1035w, https://bloximages.chicago2.vip.townnews.com/theeagle.com/content/tncms/assets/v3/editorial/3/06/306747df-23f9-5dd5-854b-4d5b1fc4a625/643f3299c6e9b.image.jpg?resize=1080%2C770 1200w)
While the latest Fed rate hike is less severe than some of the previous increases, it’s not likely to be the last. At a March 22 press conference, Powell indicated his resolve to continue using the federal funds rate to try and tamp down inflation, despite calls from policymakers and others to reevaluate the strategy.
“Inflation remains too high and the labor market continues to be very tight,” he said. “Reducing inflation is likely to require a period of below-trend growth and some softening in labor market conditions.”
This means that the country will likely see at least one more rate increase within the year. But when the next rate hike will occur, or how much it will be, remains to be seen.
The Federal Reserve previously projected a “terminal rate” of 5.1%. A terminal rate is the upper threshold of the federal funds rate for a given strategy. In this case, it means that the Fed predicts that 5.1% – which represents a range of 5.00 – 5.25% – would be the limit for this round of rate increases. One more 25-point increase would put the funds rate in that range.
Currently, the Federal Open Market Committee (FOMC), which is the Fed’s monetary policymaking body, is set to meet six more times this year. The next rate hike, or at least an announcement of one, will likely take place at one of those times. Those meetings are scheduled for the following dates:
– May 2-3
– June 13-14*
– July 25-26
– September 19-20*
– October 31-November 1
– December 12-13
* Meeting associated with a Summary of Economic Projections
How high can auto loan rates get?
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Auto loan rates are directly correlated to the funds rate. As long as the federal interest rate continues to go up, auto finance rates will go up along with it.
In the short term, borrowers can expect to see – or may already be seeing – an increase as a result of the latest Fed rate hike. The same can be said for whenever the next interest rate hike comes. That means that the average auto loan rates for new cars could very likely exceed 7% by the end of 2023, with other types of loans seeing similar increases. The last time that happened was between 2005 and 2008.
But while current rates are high in recent context, they’re still historically low when compared to almost any time more than 18 years ago. Before May 2008, average auto loan rates were only lower than the current rate for a span of nearly two years between 2003 and 2005.
When will auto loan rates come down?
There are other factors that influence auto financing rates, but the federal funds rate has the biggest impact by far. Just as it’s reasonable to expect APRs to go up along with the funds rate, it’s also reasonable to expect it to go down with it when that happens. And that could be relatively soon.
While Americans will likely see another Fed rate hike this year, that could be close to the last. As mentioned previously, another hike would bring the interest rate to or beyond the stated terminal rate of 5.1%. In December of 2022, the Fed indicated that it expects the funds rate to fall to 4.1% by the end of 2024 after reaching the 5.1% mark by the end of 2023.
If that holds true and the federal interest rate begins to fall, auto loan rates should start to drop shortly after. The result could be a bit of relief for both consumers and businesses in the automotive industry.
This story originally appeared on Automoblog and has been independently reviewed to meet journalistic standards.
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