Fed raises interest rates for third time; What this means for car buyers

For the third time in just three months, the Fed has voted a significant increase in interest rates. The move was designed to curb soaring inflation, which could impact car buyers. But it is likely to hit the housing market much harder.

The Board of Governors of the US Federal Reserve, commonly known as the Fed, announced the decision yesterday. The Fed has now raised its rate this year by 2.25 percentage points and plans to push rates to 3.5%, if not higher, by the end of the year.

Cox Automotive Chief Economist Jonathan Smoke explains, “A one point change in a 30-year mortgage has a 12% impact on the average payment, all other factors being equal. A variation of 1 point on a car loan over 6 years has an impact of 3% on the average monthly payment.

Cox Automotive is the parent company of Kelley Blue Book.

Limited impact for new car buyers

The Fed’s decision will have a limited impact on new car buyers, however, as other factors have already changed their choices.

Supply chain issues have prevented automakers from building cars as quickly as they normally would. With limited capacity, they focus on building the products that make them the most money. Dealerships have fewer and more expensive cars to sell.

As a result, the average price of new cars hit an all-time high this summer, hitting over $48,000.

This trend means new car buyers this year are mostly “higher income, better credit quality buyers who are less negatively impacted by current inflation trends,” Smoke said.

If interest rates rise enough to slow demand for new cars, Smoke says, dealerships could start increasing inventory. “In this scenario, we could see the return of some discounts and incentives.”

But, for the most part, the limit on new car sales has been supply, not credit availability.

Used-car buyers are already feeling pain elsewhere

In the used car market, different factors apply.

“Used vehicle buyers are more likely to be more negatively impacted by higher energy, food and rent prices,” Smoke says. Higher loan rates could drive some subprime buyers away from used car lots. But many have already been driven out by the same squeeze on their budgets that the Fed is trying to correct.

Used vehicle inventories have moved closer to normal levels and used vehicles are depreciating again, Smoke says.

The average price of used cars fell in June and used car lots are starting to fill up with cars. Meanwhile, fewer consumers were eligible for auto loans even before this latest Fed decision.

“With auto loan rates continuing to rise, the U.S. vehicle market becomes even more reliant on higher priced products and higher income buyers,” Smoke said. “As a result, the dream of a new vehicle is fading for more American households.”