Higher borrowing costs are landing on car buyers already stretched by rising prices at the grocery store and the gas pump. On today’s edition of CBT Live, Dan Varroney, Economic Growth Strategist, Author and Founder and CEO of Potomac Core, broke down what the first rate hike in more than three years by the Federal Reserve means for dealers.
The quarter-point increase will likely not change payments for buyers with fixed-rate car loans, Varonney said, but it could push shoppers facing average payments above $700 a month toward smaller or used vehicles and some may leave the market entirely.
The hike looked strange to Varroney with the economy running strong, and he opposed it immediately. Inflation stands at 3.4%, and one full percentage point of that comes from the energy price shock. Without it, inflation would sit at 2.4%, only four-tenths of a point from the Fed’s target. Another increase in October or December looks more likely by the day. The Fed is weighing two more beyond that, he said. If the Iran conflict ends and energy prices fall, further hikes would be a major mistake.
Varroney said dealers can soften the impact by promoting the Big Beautiful Bill tax incentive for loans on U.S.-built vehicles. Leaning into the service business also helps. Foot traffic and wages will show where the market is headed.
