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Fed Leaves Rates Unchanged

September 22, 2016

By Eric Gandarilla

WASHINGTON, D.C. — In a 7-3 decision, the Federal Reserve elected to keep interest rates at the 0.25% to 0.50% level it has maintained since the last interest rate hike in December of 2015.

In a statement following its decision, the Federal Open Market Committee noted that although job gains have been solid and household spending has been growing, business fixed investments have remained soft. The committee also cited inflation running below expected levels as a contributing factor to its decision.

“The committee judges that the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the statement read.

A matter of when to increase the federal interest rate was the root of the 7-3 split, according to the statement. The three dissenters, Esther L. George, Loretta J. Mester, and Eric Rosengren, wanted to hike the federal interest rate to 0.50% to 0.75% during this week’s meeting. However, the seven committee members who voted in favor of maintaining the current interest rate — Janet L. Yellen; William C. Dudley; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo — said they wanted to wait until the economy was more in line with their expectations.

The Fed is still expected to increase the federal interest rate by a quarter of a percentage by the end of the year. One economist believes that although the committee’s next meeting will be in November, it will wait until its final meeting of the year in December to raise the federal funds rate.

“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the Fed’s statement read. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

When the Fed raised interest rates last December, J.D. Power surveyed consumers on whether they believed an interest rate hike would be good for the economy. Third-six percent of respondents — the majority of which were from older generations that have seen firsthand what interest rate hikes mean — believed an interest rate hike would be good for the economy. Respondents from younger generations, however, were not so positive about the increase.

In August, Steven Szakaly, the National Automobile Dealers Association’s chief economist, said he didn’t believe even a 50 basis-point increase would do much to stunt auto sales, noting that automakers would likely roll out additional finance incentives to keep cars affordable for car buyers.

Alec Guitierrez, senior market analyst of automotive insights for Kelley Blue Book, said even a full percentage-point increase would have a negligible effect. “The Fed’s decision to keep rates steady is welcome news to potential car shoppers who have relied on longer term loans and low interest rates to offset the rising cost of new vehicles,” he said in a statement issued to F&I and Showroom, noting that the average new car sells for more than $33,000.

“Although the Fed indicated that rates could rise by a quarter point by year end, this will likely have a negligible effect on the current pace of sales,” he added. “Even an interest rate increase of a full percentage point only increases the monthly payment on a $33,000 vehicle financed for 60 months by around $10 to $15, so a quarter-point increase should not scare the average consumer away.  We expect to see 17.3 million new cars sold this year, and we don’t expect the Fed decision to meaningfully impact our forecast.”

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