The federal funds rate and auto loan rates

How the federal funds rate affects finance
Auto loan rates and the federal funds rate

Seeing great deals on auto loan rates? Don't bother calling Federal Reserve Chairman Ben Bernanke to say thanks.

As with most consumer loans, auto loans are profoundly affected by Federal Reserve policy, but unlike credit cards or home equity lines of credit, auto loan rates don't move in lock step with the federal funds rate, says Paul Taylor, chief economist at the National Automobile Dealers Association.

Instead, the Fed influences rates mostly through the buying and selling of short-term Treasuries on the open market, Taylor says. When the Fed buys Treasuries, rates on loans of similar maturities fall. To that end, the Fed has been buying Treasuries in the last few years to drive down rates.

But the rates you'll ultimately see at the auto dealership aren't just reflective of Fed policy. They're also influenced by a complex cocktail of market forces, including the market's confidence that auto loans will get paid back, the resale value of used cars in case they don't and expectations about where inflation is headed, he says. All of those are pointed in borrowers' favor right now.

"You know how people will talk about certain times when the stars are aligned? Well that's sort of how the economic variables have lined up during this recession," he says.



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