The Federal Reserve cut interest rates today for the first time since March 2020. The move will help Americans who need to borrow money to buy a new car, but analysts say it could take months to reach borrowers.
Rates moved lower by a half point.
How the Fed Affects Your Car Loan
The Federal Open Market Committee of the United States Federal Reserve, commonly called “the Fed,” sets the interest rate for overnight loans between banks. That interest rate trickles down through the economy, influencing the rate banks charge on credit cards and loans.
The Fed raised rates dramatically over the last four years in an attempt to reign in inflation. This increased the cost of borrowing, slowing purchases of big-ticket items.
Related: Is Now the Time to Buy, Sell, or Trade in a Car?
The move may have worked, but it worked slowly.
The average monthly car payment has come down. It peaked at $795 in December 2022, according to Kelley Blue Book parent company Cox Automotive.
Last month, that figure fell to $737. High interest rates made up some of that expense.
But the Fed Has Limited Power
But not all of it. Critics say home and car prices were held high not by inflation but by shortages.
In the car market, COVID-19-related supply chain problems reduced the number of cars automakers built for much of the pandemic.
Even as that problem eased, carmakers realized that only high-income, better-credit Americans could easily car shop in an era of inflated prices and high interest rates. They designed and built more high-end cars and pulled back on the number of inexpensive vehicles on the market.
New car prices have begun to come down as automakers and dealers compete through advertised discounts. Thanks to those discounts, new cars have grown more affordable. Last month, the average earner would have needed to work 36.1 weeks to pay off the average new car — the lowest such figure in more than three years.
Payments will come down further as interest rates fall. However, manufacturers’ suggested retail prices (MSRPs) are not falling.
With the rate cut, borrowing will cost less. Unless automakers start selling cheaper cars, Americans will still be left borrowing relatively high sums to buy them.
A Fed Decision Changes Your Rate Slowly
The move may take time to reach borrowers.
Cox Automotive Chief Economist Jonathan Smoke has warned that, even with a rate cut today, “it is not likely that auto loan rates will decline much before year’s end.”
Thomas Drechsel, an economics professor at the University of Maryland, told CNN, “It’s a bit like [the Fed is] steering a big ship, and even though they’re turning the wheel, it takes time until the ship makes that movement.”
