Federal Reserve leaves interest rates unchanged, says more 'confidence' needed in inflation slowdown before cuts

WASHINGTON — The Federal Reserve left interest rates unchanged on Wednesday but took a major step toward lowering them in coming months in a policy statement that tempered inflation concerns with other risks to the economy and dropped a longstanding reference to possible further hikes in borrowing costs.

The U.S. central bank's latest policy statement gave no hint that a rate cut was imminent and indeed said the policy-setting Federal Open Market Committee "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%," the Fed's inflation target.

For the auto industry, interest rates remain top of mind for franchised dealerships.

That issue ranked first in Automotive News’ 2024 Dealer Outlook Survey, the second year in a row it has done so. Half of the respondents selected interest rates as the factor they’re most concerned about. Vehicle affordability and lower new-vehicle profit margins ranked second and third.

"Inflation has eased over the past year, but remains elevated," the Fed said in the statement after a two-day meeting, restating that officials "remain highly attentive to inflation risks."

The language will be a blow to investors who have been expecting rate cuts to start as early as March.
But the Fed also nodded to concerns about the employment side of its mission as well, and opened the door to lowering the policy rate if inflation, as expected, continues drifting lower in coming months.

Ben Keating, president of Keating Auto Group, of Victoria, Texas, said many consumers aren’t able to “pay a 10 or 12 percent interest rate.” Those who can afford the higher payments are likely holding out in protest of higher monthly payments, he said.

Also in the survey, nearly two-thirds of dealers and managers believe higher interest rates will increase dealership floorplanning expenses in 2024, while 63 percent said interest rates will reduce consumer demand for new vehicles compared with 2023.

Keating said if the Fed cuts rates three times in 2024 to total three quarters of a percentage point, that could be good for business.

“It’s going to massively influence [consumers’] willingness to bite the bullet and go ahead and buy that new car they’ve wanted,” Keating said.

Nearly two-thirds of those surveyed said they expect the Fed will make two or three rate cuts in 2024. About 14 percent expect there will be none this year, 7.3 percent said one, 5.1 percent anticipate four or more and 10 percent are unsure.

At the American Financial Services Association conference Tuesday in Las Vegas, interest rates also were a topic of discussion. At the conference’s opening session, panelist Melinda Zabritski, Experian's senior director of automotive financial solutions, said expensive vehicle prices combined with high interest rates pushed the average monthly payment to $730 for a new vehicle in 2023.

To circumvent high interest rates, 21 percent of new vehicles are now paid for in cash, cutting sharply into loan opportunities and potential finance and insurance revenue, Zabritski said. That compares with an average rate of cash deals of about 13 or 14 percent historically, she said.

Consumer financial stress likely will worsen in 2024 as high interest rates and prices continue to hit pocketbooks, said panelist Tim Gill, AFSA's  chief economist .

“The impact of three or more years of unusually high price increases is taking a toll,” he said.

Reuters and C.J. Moore contributed to this report.