Fed flags end of rate hikes, sees lower borrowing costs in 2024

WASHINGTON — The Federal Reserve held interest rates steady on Wednesday and signaled in new economic projections that the historic tightening of U.S. monetary policy engineered over the last two years is at an end and lower borrowing costs are coming in 2024.

In a new policy statement, U.S. central bank officials took explicit account of the fact that inflation "has eased over the past year," and said it would watch the economy to see if "any" additional rate hikes are needed — implying directly that, after months of aggressive tightening and a bias towards moving rates higher, they may not need to move higher again.

The Federal Reserve's benchmark interest rate decisions affect the price lenders pay to borrow money, costs that might be passed on to consumers in the form of higher interest rates.

A near unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024 than it is now — with the median projection showing the rate falling three-quarters of a percentage point from the current 5.25-5.50 percent range. No officials see rates higher by the end of next year.

For an institution that has been reluctant to declare victory over inflation that spiked last year to a 40-year high, the updated projections and new statement mark a notable shift in tone and outlook.

Auto industry impact

For the auto industry, interest rates continue to be the top issue mentioned by franchised dealerships during the fourth quarter. It was cited by 73 percent of dealers as the top factor holding back their business, according to the Q4 2023 Cox Automotive Dealer Sentiment Index. That’s an 8 percentage point jump from the third quarter and up 15 percentage points from a year ago.

Similarly, 63 percent of independent dealers surveyed also put interest rates as the top factor holding back their business this quarter — a 3 percentage point rise from Q3 and a 17 percentage point jump from a year ago. 

New-vehicle interest rates rose from 4.5 percent in March 2022 to 7.4 percent in August 2023 where it remained through November. Used-vehicle APRs went from 8.1 percent in March 2022 to its current 11.6 percent, according to Edmunds.   

“Interest rates and high prices are just killing traffic and prompting customers to delay their vehicle upgrades,” a Toyota dealer in the Northeast told Cox. “People who bought during the pandemic are buried and couldn't trade out even if the interest rates weren't tacking on so much more to payments.”  

A Chevrolet dealer in the Northeast said interest rates are “greatly hampering our ability to entice customers to buy.

“There may be initial interest but that subsides once they see how much the payments will be. Between vehicles prices having increased markedly in the past few years, and now interest rates, it is a real shock to a lot of potential buyers.”

Dealership finance-and-insurance departments might have a harder time capturing revenue from those sales if high interest rates send customers fleeing to cash deals or cheaper outside financing.

Reuters and Dan Shine of Automotive News contributed to this report.