Eddie Ghabour, co-founder of Key Advisors Wealth Management, speaks with Varney & Co. about how the Fed's decision to cut interest rates will impact markets in the near term.
Americans looking to buy a car in the near future may be hoping that the Federal Reserve's 50 basis point cut in the federal funds rate on Wednesday might lower the interest rate on their next auto loan, but analysts at Bank of America say they won't see a big impact on borrowing costs in the near future.
Ahead of the central bank's announcement, Bank of America Securities published a profile for the auto industry, saying that while a bailout may be on the way, a series of cuts will be needed before consumers see a real improvement in affordability.
An AutoNation dealership in Las Vegas, Nevada, USA, on Tuesday, July 18, 2023. AutoNation is scheduled to report earnings on July 21. Photo by Bridget Bennett/Bloomberg via Getty Images (Bridget Bennett/Bloomberg via Getty Images/Getty Images)
The report said rising interest rates due to the Fed's aggressive anti-inflation measures in recent years have made home affordability a key issue, noting that since the central bank began its rate-hiking campaign in early 2022, the national average 60-month new car loan rate had risen about 430 basis points to 7.8% as of the end of last month.
Analysts said that was the highest level since 2001 and above the average of about 5.4% over the past two decades.
The Federal Reserve cuts interest rates by half a percentage point, the first cut in four years.
Bank of America had expected a 25-basis-point cut this week, but acknowledged that some economists had expected a 50-basis-point cut. “Regardless of the size of the cut, there will be some delay in the federal funds rate reduction filtering down to auto loan rates at the consumer level,” the analysts wrote, adding that “consumers will likely not start to benefit from the rate cut until 2025 or later.”
Federal Reserve Chairman Jerome Powell speaks during a press conference following the Federal Open Market Committee meeting at the Federal Reserve Board of Governors in Washington, DC on July 31, 2024. (Photo: ROBERTO SCHMIDT/AFP via Getty Images/Getty Images)
But it will take more than a single rate cut from the Fed to make a noticeable difference in auto loan rates. Starting in 2022, rising rates have pushed the average payment on a new car loan up by $108 a month to $967, an increase of 12.5%, analysts said.
Analysts estimate that for every 100 basis points that interest rates are cut, the average auto loan payment would fall by about $20.
Fed interest rate cuts won't relieve credit card debt
Bank of America said its global economics team expects the Fed to cut rates by 25 basis points per quarter after Wednesday's cut, with the final rate in the 3.25% to 3.50% range through 2026. Rates currently range from 4.75% to 5%.
Meanwhile, a recent report from car shopping guide Edmunds suggests that potential car buyers could be in for an unpleasant surprise when it comes to financing their next vehicle.
FOX Business' Jeff Flock reports on the latest news from the auto industry, where data reveals that insurance rates are skyrocketing year-over-year.
The survey found that while three in four used-car buyers are currently aiming for an interest rate of 0% to 5%, six in 10 people who took out a loan to buy a used car in July ended up with an interest rate between 6% and 11%.
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Edmunds also found that prices of new and used cars currently for sale are higher than what buyers are prepared to pay.
Overall car affordability isn't expected to improve anytime soon, either, as auto insurance and maintenance costs continue to rise.
