While smaller than the increases policymakers unfurled last year, the Federal Reserve made the expected move on Wednesday of pushing the target for the Federal Funds Rate up by another 25 basis points to the 4.50% to 4.75% range.
The move is likely to make it more challenging both for consumers to secure auto financing as well as small businesses like dealerships to get the financial resources they need, according to analysis from Cox Automotive and Cornerstone Advisors.
Federal Reserve chair Jerome Powell reiterated during his news conference following the announcement that, “Over the past year, we have taken forceful actions to tighten the stance of monetary policy.” Powell pointed out that the Fed has raised interest rates by 4-1/2 percentage points during the past year in an effort to slow inflation, with more rate upticks likely coming later in 2023.
The next opportunity for an interest rate jump comes on March 22.
“Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. But that’s not grounds for complacency. Although inflation has moderated recently, it remains too high. The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Powell said.
“Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done,” he went on to say.
Implications in auto finance
Cox Automotive chief economist Jonathan Smoke offered his reaction to the Fed actions through his blog, focusing on the used-vehicle market.
“The only hope for vehicle affordability relief in the near term will be in the used market, where declining used retail prices are starting to create more buying opportunities. This has led to January seeing positive momentum in used retail sales. However, the reduced level of new-vehicle production since 2019 and the shift towards more expensive vehicles that were produced and sold means that supply will be constrained in the used market for several more years,” Smoke said in his online analysis.
“If the economy avoids a recession, once rates peak and stabilize, used demand should improve as depreciation will lead to even more buying opportunities in the used market. Those opportunities will help to stabilize vehicle values and return the market to seeing normal depreciation rather than the abnormal increases and decreases the market has experienced since 2020,” Smoke continued.
Smoke also reiterated that if interest rates reach what he called “the terminal point,” that it could be “terminal” for the economy, as well.
“However, if the Fed’s actions cause consumers to pull back and businesses respond by cutting jobs, retail demand for new and used vehicles will decline. Pent-up demand in the face of a declining economy with two to three million job losses will not save the vehicle market if prices and rates remain high,” Smoke said.
“As is clear from the still hawkish stance from the Fed communicated today, recession risk in 2023 remains elevated. The Fed may still avoid going too far if there is hard data that leads them to alter their course away from more increases by the next two meetings, which are March 22 and May 3. That’s the future, though. In the near term, we know vehicle affordability is the industry’s biggest issue, and nothing the Fed reported today is likely to change that fact,” Smoke went on to say.
Implications on banks & small businesses
And speaking of employers as well as banks and credit unions, Ron Shevlin, chief research officer at Cornerstone Advisors, addressed those elements and more through a report released in January titled, “What’s Going On In Banking 2023: Fighting the Headwinds, Riding the Tailwinds.”
The fintech expert highlighted four key findings through a news release, including:
—Growing deposits will be a priority in 2023. Banks’ concerns over small business deposits soared to 72% from 41% in 2022. For credit unions, retail deposits topped the list, skyrocketing from 18% in 2022 to 70% in 2023.
—Banks and credit unions remain seemingly indifferent to the revenue growth potential of real-time payments. Nearly 40% have not determined an RTP strategy.
—72% of banks place a high priority on growing deposits from small businesses.
—Banks plan to invest nearly $4 million in fintech startups in 2023 (an increase of $1 million over 2022) while credit unions plan to invest just over $1 million (a slight decrease from 2022).
—28% of banks plan to invest in/implement application programming interfaces (APIs) in 2023.
“Interest rates bumped last year’s top concern of finding qualified talent down a notch or two in this study’s ratings. But a more notable year-over-year change was the significant increase in the percentage of executives who mentioned cost of funds as a concern this year,” Shevlin said in the news release. “That number climbed from less than 10% in 2022 to more than 40% in 2023.”
This content was originally published here.
