The Federal Reserve elected not to change its benchmark interest rate at its March meeting. As recently as late last year, the Fed projected many rate cuts in 2025. Amid economic uncertainty and a smoldering trade war, the central bank has updated its outlook to say it may cut rates just twice this year.
Several board members said they do not expect to cut rates at all in 2025.
Cox Automotive Chief Economist Jonathan Smoke explains, “The updated outlook is for less growth, more inflation, and higher unemployment. None of that is good news for the auto industry.”
Cox Automotive owns Kelley Blue Book.
Explaining the Fed
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” is a committee of 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.
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The Fed sets the interest rate for overnight loans between banks. Banks then use that rate to decide what interest rate to charge for credit cards and loans.
The central bank kept rates at a two-decade high early in 2024, attempting to slow inflation. That left many middle-income Americans struggling to afford big-ticket purchases like homes and cars.
Last September, it finally began to cut rates. The move was trickling through the economy late last year. Lenders began approving more loans, and the rate Americans paid to borrow was falling.
That period is over.
Tariffs, Tariff Threats Driving Inflation Worries
The Fed is charged with both managing inflation and maintaining economic growth, Smoke explains. “The Fed remains focused on their dual mandate, but trade policy changes being pursued by the Trump administration are making that challenging.” A raft of tariffs and tariff threats have most economists predicting more inflation.
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“With inflation expectations rising, the Fed cannot cut rates further even though labor market conditions are expected to deteriorate,” Smoke says.
In the fourth quarter of 2024, new auto loan rates dropped almost a full percentage point and used loans half a point. In the first quarter of 2025, that progress has been erased, and then some. New auto loan rates have risen a full point. Used loans have increased by more than a point and a quarter, hitting a 25-year high last month.
Consumers are still shopping, Smoke says. Spring often sees a surge of shoppers as tax refunds reach bank accounts. But, Smoke says, those high rates force shoppers “to consider older vehicles to find a price that will deliver a workable monthly payment.”
Should tariffs on Canada and Mexico go into effect as planned on April 2, demand could surge as consumers rush to buy the vehicles already in the country (and thus not subject to import duties).
“If tariffs persist, vehicle sales will eventually decline as prices rise,” Smoke says. “Auto manufacturers are also likely to cut production, keeping supply tight. Some affordable models may be eliminated due to increasing costs that make them no longer attractive to buyers, and that ironically will cause average prices to rise further even when sales are declining.”
The automotive market, Smoke says, “appears to be on the cusp of a time reminiscent of 2021-2022 but without the benefit of low interest rates.”