How the Fed's rate cut will impact auto loans

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Key Advisors Wealth Management co-founder Eddie Ghabour discusses how the Fed rate cut decision will impact markets in the near term on Varney & Co.

Americans looking to buy a vehicle in the near future might feel hope that the Federal Reserve's 50-basis-point federal funds rate cut on Wednesday might bring down the interest rate on their next auto loan, but Bank of America analysts say there will not be much of an impact on borrowing costs in the near future.

Ahead of the central bank's announcement, Bank of America Securities released an auto industry overview saying that relief may be around the corner, but it will take a series of cuts before consumers see any material improvement in affordability.

An AutoNation dealership in Las Vegas, Nevada, US, on Tuesday, July 18, 2023. AutoNation Inc. is scheduled to release earnings figures on July 21. Photographer: Bridget Bennett/Bloomberg via Getty Images (Bridget Bennett/Bloomberg via Getty Images / Getty Images)

The report said rising interest rates from the Fed's aggressive campaign to fight inflation in recent years has made affordability a key issue, noting that since the central bank launched its rate-hike campaign in early 2022, the national average 60-month new vehicle loan rate has climbed roughly 430 bps to 7.8% as of the end of last month. 

That is the highest level since 2001, the analysts noted, and above the average over the last 20-plus years of around 5.4%.

FEDERAL RESERVE CUTS INTEREST RATES BY HALF-POINT; FIRST RATE REDUCTION IN FOUR YEARS

BofA had predicted a 25pb cut this week, but acknowledged some economists expected the 50bp cut that materialized. «Regardless of the magnitude, we highlight that the transmission of a lower fed fund rates to auto loan