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Auto industry may feel most heat from Federal Reserve rate hike

December 18, 2015
Outside of banks, autos arguably are the most rate-dependent business. So the Federal Reserve’s Dec. 16 move to hike its benchmark short-term interest rate will have the auto industry closely watching what the move will do to sales that are likely to top 17 million this year for the first time since the Great Recession.
Fed policymakers have stressed they intend to nudge up rates gradually and in small increments, and will pull back if the economy falters, tempering the impact on consumers and businesses.
"(Low rates) definitely have been a factor in people’s buying decisions," said Mark Scarpelli, president of Raymond Chevrolet and Kia in Antioch and the incoming 2016 vice chairman of the National Automobile Dealers Association. Auto loans have been cheap, with rates ranging from zero percent with manufacturers’ incentives to 3 percent or so for typical five-year loans, he said.
But Scarpelli said the improving economy and job market, low gasoline prices, and consumers’ need to replace aging vehicles are more significant. The typical car on the road is more than 11 years old, a record high, according to IHS Automotive. Scarpelli said his sales are up 25 percent this year.
"Consumers are responding to the need to replace their car or truck," he said.
The Fed’s decision to raise interest rates for the first time since June 2006 is akin to a doctor’s decision that a patient is well enough to be gradually taken off medication. In other words, the Fed thinks the economy is finally healthy enough that borrowing costs should return to more "normal" levels to help keep future inflation from accelerating too much.
But it is a moment with challenges. It could send markets into a tizzy (if past experience is any guide), lead to slower economic recovery and make it harder for workers to press for higher wages. For savers, it could signal higher returns, but those borrowing to buy a house or a car may have to pay more.
Nearly seven years ago, the Fed put its benchmark interest rate close to zero as a way to bolster the economy. And for months, officials have said they might raise rates by the end of 2015.
Still, while the economy has rebounded, certain aspects of the recovery—like the housing sector, work force participation, and hourly wages—are spotty at best.
Charles Evans, president of the Federal Reserve Bank of Chicago, who previously opposed a rate increase this year, on Oct. 12 said "the precise timing for the first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process." He, like other Fed officials, stressed the need for a very gradual increase in rates.
Janet Yellen, the Fed chairwoman, and other Fed officials went out of their way to provide plenty of advance warning of the rate increase. Yellen said that when the Fed finally acted, she wanted to make sure investors saw it coming, so as not to shake the stock market.
Scarpelli said slightly higher rates "don’t seem to make people walk away from a deal. … It will have a measured impact," largely by prodding some consumers to buy less expensive vehicles. He expects higher rates to trim sales by less than 1 percent in one year and up to 2 percent in two years.