July 9, 2020

Unchanged Fed rate signals pessimism for 2020’s second half

The Federal Reserve stayed the course on the benchmark interest rate last week, highlighting expectations for a rough road ahead for the U.S. economy. Until the coronavirus crisis ends, the lending environment will likely remain under duress.

Opportunities remain in the new-car market — but one economist says inventory challenges, a tighter credit environment and high unemployment rates will hinder sales.

The benchmark rate, which directly impacts auto lending, is a litmus test for the health of the lending market. The nation’s central bank cut rates to zero in mid-March to ease the flow of credit as the coronavirus ravaged key U.S. auto markets. Auto loan rates have largely benefited from the drop, though Cox Automotive’s chief economist, Jonathan Smoke, noted in his blog that subprime buyers remain challenged in credit access.

“Lower rates are helping to drive down average loan payments, but the consumers getting those lower payments are much more likely to have the best credit scores,” Smoke said.

Automakers continue to pull back on the incentives that drove down interest rates charged on new-vehicle loans in April and May.

There has also been substantial tightening in the credit market, Smoke noted, as lenders attempt to shield themselves from losses down the line by restricting access to consumers with riskier credit.

Another concern is that the pent-up demand retailers are banking on may be less of a flood and more of a trickle. The aggressive automaker incentives may have moved metal in March and April, but it also could have cannibalized consumer demand as it pulled ahead buyers. For the rest, Cox Automotive cites 36 percent of potential customers are delaying their automotive purchases, citing market uncertainty and fear of unemployment.

Dealerships should brace themselves for a rough second half to 2020.