Fed's Powell doesn't rule out small rate cut in September

Investors foresee and the Federal Reserve hasn't ruled out a cut to its benchmark rate target in September, a move that could lower interest rates on auto loans. But a Cox Automotive economist warned dealers and consumers still might not see much relief this year.

Federal Reserve Chairman Jerome Powell, at a press conference after the latest Federal Open Market Committee meeting July 31, told reporters a cut to the federal funds rate could be near.

"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," Powell said July 31, though he cautioned "we have made no decisions about future meetings, and that includes the September meeting."

The July Fed meeting did not change the central bank's target range of 5.25 to 5.5 percent, which has been in place since July 2023. The Fed leveled off at that point after a spate of rate increases beginning in March 2022 — a time when the federal funds target had been 0 to 0.25 percent — that were meant to fight inflation. In June, the Fed's preferred inflation metric remained at 2.6 percent, above the 2 percent mark the central bank seeks but better than the 3 percent in June 2023 and a significant improvement from 6.8 percent in June 2022.

On Aug. 1, the day after that Fed meeting, the FedWatch tool from derivatives marketplace CME Group found 100 percent agreement in the market that the Fed would make a cut in September. The tool predicts the likelihood of changes to the central bank's rate using the prices of 30-day Fed Funds futures contracts — financial vehicles investors can purchase to hedge the risk of interest rate changes down the line.

In contrast, the day after the Fed's June meeting, 90 percent of investors predicted the central bank would keep rates in the 5.25 to 5.5 percent range for July, according to FedWatch. They proved to be correct.

“I see where the Fed held today,” Penske Automotive Group CEO Roger Penske told an earnings call July 31. “Hopefully they're going to make some noise here in the next month or so, we'll see that benefit will help us on our floorplans, and obviously, you know, on a finance deal it will help immensely.”

The Fed is tasked with price stability but also producing "maximum employment," and it balances both goals in setting monetary policy. Powell said the central bank would consider multiple pieces of data, not just one or two statistics, and make the call based on whether "the totality of the data" and "the evolving outlook in the balance of risks" show a good job market and "rising confidence" on inflation.

"If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September," Powell said.

He offered as an example a scenario in which "growth remains, let's say, reasonably strong," inflation declines "quickly, or more or less in line with expectations," and employment holds steady. In that case, "a rate cut could be on the table" in September, he said.

The Fed's rate changes since March 2022 have included 0.25 point increases but also hikes as high as 0.75 points. However, the Fed didn't seem to have an appetite to cut its benchmark range by more than 0.25 points in September. A 0.5 point rate cut is "not something we're thinking about right now," Powell said July 31.

Changes to the benchmark rate can have a ripple effect on the interest rates that auto lenders charge borrowers, which in turn affects the affordability of the monthly payments available to consumers.

"Our data says that average selling price of a new car in the third quarter was down $1,000," Group 1 Automotive CEO Daryl Kenningham said on an earnings call July 24. "So if you combine that with some lower interest rates, that should take some pressure off the consumer."

AutoNation CFO Thomas Szlosek said on an earnings call July 31 that the recent CDK Global software outage challenged the group "in an environment where high interest rates are already consuming more of our customers' monthly budget."

Interest rates have emerged to become the No. 1 problem affecting franchised dealerships, and they remained the top hindrance in the second quarter, according to Cox Automotive polling.

However, a cut in September won't solve higher auto loan interest rates immediately, said Jonathan Smoke, chief economist for Cox Automotive.

"It is doubtful that auto rates will rapidly decline as soon as the Fed starts cutting," Smoke wrote in a Cox post July 31 after the latest Fed meeting. "With auto loan performance shaky, auto loan rates are bound to be sticky on the way down. That means that the Fed waiting compounds the wait for consumers."

Smoke said the average June new-vehicle loan charged 9.72 percent interest, up 0.5 points from a year earlier, while the average used-vehicle loan sat at 14.2 percent, up 0.5 points.

"Once the Fed Funds rate is headed for neutral, the average rate on new auto loans is likely to end up between 7.5% and 8%," Smoke said. "Given what the Fed communicated today, it is not likely that auto loan rates will decline much before year's end and, unfortunately, the auto market will remain stuck below potential."

— Gail Howe, Paige Hodder and Mark Hollmer contributed to this report.