On the Dash:
- The Fed raised rates a quarter point to 3.75% to 4%, its first hike since 2023.
- Most Fed officials project at least one more rate increase before the end of 2026.
- New-car loan APRs could rise about 12 basis points in the months after the hike.
The Federal Reserve raised its benchmark interest rate by a quarter percentage point Wednesday. The hike moves the federal funds target range to 3.75% to 4%, the Fed’s first increase since 2023. That benchmark influences the prime rate, which in turn shapes auto loan rates.
The unanimous decision comes as policymakers grapple with stubborn inflation, made worse by a recent rebound in oil prices. Wall Street widely expected the move after months of signals that a hike was coming.
More hikes could follow before year-end
Most Fed officials expect at least one more rate increase this year, according to the central bank’s latest projections. The median forecast has the federal funds rate ending 2026 at 4.1%. Twelve officials projected one more hike this year, while four anticipated two. Two officials said rates should stay at current levels. Chairman Kevin Warsh withheld his forecast, as he did in June.
The Fed also nudged its inflation outlook higher. Officials now project core personal consumption expenditures (PCE) inflation of 3.4% by year-end, up from 3.3% in June.
What a quarter point means for car payments
Existing auto loans are fixed, but a Fed hike can push up rates on new loans, CNBC reported. WalletHub estimates the average 48-month new-car APR rises about 12 basis points in the months after a quarter-point hike.
Financing costs were already elevated heading into the decision. Edmunds data puts the average new-car loan rate at 7% and the average used-car rate at 10.6%. Prolonged high rates are pricing middle- and lower-income buyers out of the new-vehicle market, Edmunds said in July. Wealthier buyers have been better able to absorb higher financing costs.
Experian reported the average new-vehicle monthly payment reached $765 in the second quarter, while Kelley Blue Book put the average new-vehicle price at $50,089 in August.
Credit tier still drives the rate buyers see
A better credit tier can matter more to a buyer’s rate than a Fed move. Experian data shows super prime borrowers averaged 4.41% on new-car loans in the second quarter. Deep subprime borrowers averaged 16.11%.
Cox Automotive’s Dealertrack Credit Availability Index climbed in June to its highest level since December 2015. The index tracks how easily consumers can get auto loans. Fed rate moves can also affect dealership floorplan financing and the rates indirect lenders offer.
The Fed’s next policy meeting is scheduled for Oct. 27-28.
