Reduction in Fed interest rates unlikely to spur a rise in Q4 auto sales in the U.S.

The U.S. auto market is expected to undergo significant changes in the coming years, with various factors influencing its trajectory.

Recent data suggests that consumer confidence has taken a hit, as evidenced by The Conference Board's Consumer Confidence Index survey, which showed a steep decline in late September. This decline, coupled with less savings among consumers, has resulted in fewer down payments on new vehicles.

Despite the Federal Reserve Board's interest rate lowering in September 2022, the 10-year yield on U.S. Treasury bonds has been trending upward. However, financial conditions may soon start to loosen due to the interest rate lowering. The Fed plans to lower the federal funds rate through the end of 2025, aiming to lower it to 4.4% by December and 3.4% by the end of 2025.

This interest rate reduction could have a significant impact on U.S. auto finance institutions, such as Ally Financial, Capital One Auto Finance, and other major lenders. These institutions are likely to adjust their new auto loan interest rates downward, potentially reducing them by around 0.25 percentage points in line with the Fed’s cuts. This could bring interest rates down from about 4.25% to near 4.0% or lower.

Adjusting for inflation, the magnitude of new vehicle monthly payment declines in 2025 could be the largest since 2010 and the second largest since 1980. This increased affordability, combined with lower interest rates, may lead to further increases in new vehicle sales in 2025.

However, auto lending-specific issues such as higher FICO requirements and restrictive loan-to-value ratios will continue to limit the pool of potential borrowers and restrain demand. This means that the impact of lower interest rates on auto loans may not drive additional retail sales in the short term.

In addition to interest rates, market conditions will likely vary by region. Higher unemployment and cost of living may slow sales in some regions, while population growth, a strong job market, and lower cost of living may boost sales in others.

On the supply side, automakers have been ramping up incentives to stabilize inventories in recent months. Inventories have now stabilized as 2025 models begin to flood dealer lots.

One segment that is expected to drive demand for commercial vehicles is construction professionals and contractors, according to a blog post by Jonathan Smoke, chief economist at Cox Automotive.

Finally, it's worth noting that people who move are more likely to buy a new vehicle after changing residences. This trend, combined with the improving affordability and lower interest rates, could lead to increased new vehicle sales in the U.S. next year.

In conclusion, while the U.S. auto market is facing challenges, the lowering of interest rates and stabilizing inventories could lead to increased affordability and sales in the coming years. However, the impact may vary by region and other factors, such as consumer confidence and lending requirements, will continue to play a role.