- The Fed held rates steady at its July meeting this week
- Lenders have started dropping rates on their own for those with good credit
The U.S. Federal Reserve declined to change its benchmark interest rate yesterday. Increasing disagreement between the members suggests the board may make a cut before the year is out. But, for now, rates are staying steady.
Lenders, however, have started slowly decreasing rates on their own.
Related: Is Now The Time to Buy, Sell, or Trade-in a Car?
Explaining the Fed
- The Fed is a board of experts that sets a master interest rate that influences what banks charge for loans and credit cards
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” sets the interest rate for overnight loans between banks.
That rate then trickles through the economy as banks use it to calculate the rates they charge on mortgages, auto loans, and credit cards.
The board is made up of 11 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.
Fed leaders speak often of their “dual mandate” – responsibilities to keep unemployment low and prices stable.
That can be politically controversial, particularly in an era of constantly shifting tariffs making prices harder to predict.
Changes on Hold, With Some Dissent
- The board is almost always unanimous in its decisions
- This time, the vote was 9-2
This month’s vote was not unanimous. For the first time in more than 30 years, two members voted against the majority.
Fed Chair Jerome Powell’s term ends next May. Two members seen as likely successors both voted to cut rates.
“That alone,” says Cox Automotive Chief Economist Jonathan Smoke, “suggests that if data continue trending the way it has, the Fed will cut before the year is over.”
Cox Automotive owns Kelley Blue Book.
Lenders Lowering Rates Slowly
- Loan rates are improving slowly for those with good credit
“Average auto loan rates have been declining modestly over the last two months,” Smoke says. The improvement, so far, has been limited to new loans to consumers with strong credit scores.
Lenders extended more loans with 0% interest rates in June than in any other month in the past three years.
“It is highly likely that, with sales slowing, consumers will benefit from attractive financing offers for the rest of the summer, but the catch is that those offers are typically only available to well-qualified buyers,” Smoke notes.
Those without good credit can’t expect the same. “The average consumer is likely out of luck for a dramatic improvement in affordability, especially with tariffs likely to push new vehicle prices higher,” he says.
Improving Your Credit Will Help You More Than a Rate Cut
- Many Americans saw a recent major hit to their credit scores
Consumers can still do something to make cars more affordable without waiting for the Fed, Smoke says.
“Instead of waiting for that to happen, consumers can secure even lower auto loan rates by improving their credit tier by one level, or approximately 100 points.”
One in five Americans saw their credit scores drop 100 or more points recently when the federal government ended student loan forbearance.