The U.S. Federal Reserve held its benchmark interest rate steady yesterday. The board didn’t even provide the traditional projection of its future moves. According to Jonathan Smoke, chief economist at Cox Automotive, the parent company of Kelley Blue Book, the central bank is waiting.
Car shoppers are starting to do the same.
Explaining the Fed
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” is a committee of financial experts appointed by the president and approved by Congress. Once Fed members are in their seats for 14-year terms, they have complete independence and don’t answer to any branch of government.
The Fed sets the interest rate for overnight loans between banks. Banks then use that rate to decide what interest rate to charge for credit cards and loans.
So, a change in the benchmark rate changes the interest rate you’ll pay on your next mortgage, car loan, or credit card.
The Fed meets eight times a year to adjust (or not adjust) rates, and usually provides a “dot plot” projecting its likely future decisions alongside each announcement.
Fed leaders speak often of their “dual mandate” – responsibilities to keep unemployment low and prices stable.
The board entered 2025 projecting several rate cuts during the year, but quickly paused them as a new administration took office and adopted policies shifting the economy.
Related: Is Now The Time to Buy, Sell, or Trade-in a Car?
Tariffs Put Fed Changes on Hold
Why the pause in rate cuts? The board’s hands “are effectively tied as announced tariffs are expected to drive inflation higher this year by at least a full percentage point,” Smoke says. “While they wait to see evidence of inflation moving up, the labor market remains strong, even though conditions are expected to deteriorate.”
“The rate path from here is uncertain,” he adds, “and uncertainty doesn’t help consumers plan for finance-sensitive purchases like homes and vehicles.”
Car Sales Slowing After Tariff Surge
The president’s tariffs, Smoke notes, provoked a short-term surge in car shopping as Americans rushed to buy the cars imported into the country at pre-tariff prices.
That led to “tighter supply and higher prices in the new-vehicle market. As a result, manufacturers have been spending less on attractive auto loan offers.”
Now that the tariffs are in effect, “incentives are down, vehicle prices are up, and the average new auto loan rate is unchanged, remaining just 36 basis points (BPs) below a 25-year high reached last June.”
Car shoppers have seen tight supplies before, during the peak of the COVID-19 pandemic. However, government relief programs helped Americans weather the economic changes then. There are no similar life rafts in sight this time.
“Consumers are far more price and payment-sensitive than they were back in 2021,” Smoke explains. With that in mind, they “may soon join the Fed in waiting to see what happens.”