Last week's decision by the Fed to boost its discount rate by a quarter of a percent will slightly increase consumer and corporate borrowing costs. But it seems unlikely to derail U.S. auto demand as light- vehicle sales close a sixth straight year of growth.
The small change in what the Federal Reserve charges its most creditworthy borrowers is expected to wash through the financial system smoothly. The first uptick in interest rates since 2006 is not a surprise. The financial world has anticipated it for years, but the Fed wanted to be certain the U.S. economy was fully recovered first.
This first move is symbolic -- monthly payments on a $25,000 five-year car loan at 3.25 percent instead of 3 percent rise $2.78, for example. But other Fed rate increases will follow -- Fed Chair Janet Yellen suggests 1 percent a year is about right -- and eventually that will affect the industry in two ways.
Most visible is the damper on auto demand. A J.D. Power report suggests a half percent rise in auto loan rates would cut sales by 150,000 vehicles, about 0.9 percent in a 17 million market. Another study sees a sudden 1 point interest-rate jump cutting auto demand 3.25 percent.
With auto sales running 5.4 percent higher through 11 months this year, either scenario would sting. Kelley Blue Book analyst Jack Nerad says last week's quarter-point change "could signal we are nearing or have reached a peak."
The other effect is painful to manufacturers and dealers. The abnormally long period of virtually free money is fading.
Dealer floorplanning and facility-improvement borrowing costs will jump. Manufacturers will pay more interest to buy tooling or subsidize 0 percent consumer incentives.
Yet if the Fed sticks to its stated pace, the cost of money will remain below historic norms for months, perhaps years. The industry should count its blessings.