Several $100 bills folded together to resemble a carThe Fed is making new cars something that only the wealthy can afford.

Yesterday, the US Federal Reserve’s Federal Open Market Committee, commonly called the “Federal Reserve,” raised interest rates for the fourth time in seven months. The move raises the interest rates banks charge each other for overnight loans, requiring them to raise interest rates on loans and credit cards that most consumers use to finance large purchases.

The Fed moved the rate with a total increase of 375 basis points this year – a rate of change not seen since 1981.

There may be further increases in the future, but the Fed indicated yesterday that they are likely to be smaller and more divergent.

The Fed took a step to try to rein in inflation on the theory that curbing big ticket purchases would slow price growth in all sectors of the economy. But this is not a controlled experiment without other input.

The car market has had two extraordinary years. High interest rates collapse in that already changing market. This collision could cause working people to struggle to buy new cars, and automakers direct their products to wealthier buyers.

As Jonathan Smoke, chief economist at Cox Automotive explains, “Living at restricted rates for more than a few months will have long-term effects on the industry and the country.”

Some buyers expelled

“As a result of higher rates, consumers who are more sensitive to payment are exiting the market,” Smoke says. He says high-risk and high-risk loans are “disappearing”.

During October, the rate-weighted rate for auto loans across all loan types increased 2.8 percentage points to 10.6%. This raises average car payments by more than 8% due to interest alone — and interest is far from the only thing raising car premiums.

In October, a high-risk borrower with a credit score of less than 580 saw an average interest rate of 18.2% on a new car loan and 21.8% on a used car loan.

“No new car sold today can be financed at rates at this level to produce affordable payments,” says Smock.

For a family making $50,000 a year, paying $400 a month for a car eats up roughly 10% of their total income.

The least expensive new car in America for most of 2022 was the Chevy Spark. When tags and title are factored in, and assuming a 10% down payment, Spark will now cost the average buyer more than $400 per month.

This pushes less affluent buyers into the used car market. But things are not much better there. “In today’s market, sub-prime buyers are primarily limited to cars 6 to 9 years old that range in age from 75,000 to more than 120,000 miles,” says Smock.

Owning these cars can be expensive because they often need constant repair.

Automakers focus on wealthier buyers

If you’re attentive, you might have noticed that we said the Chevy Spark “was” the least expensive new car in America. Chevrolet recently discontinued production of the Spark. Hyundai did the same with the inexpensive accent.

Cheap cars are disappearing.

“Before the pandemic, the auto industry was already shifting toward more expensive cars with a move to more trucks, SUVs and luxury cars at the expense of smaller, less expensive sedans,” says Smock.

When a lack of microchips left them unable to build as many cars as they liked, manufacturers used the chips they could find to produce their most lucrative cars – expensive vehicles primarily in expensive configurations.

Smok says the Fed’s move will force automakers to redouble that strategy. “With rates expected to rise and stay there for at least 2023, the auto market will become more dependent on high-income, high-income, and higher-credit consumers,” he says.

The companies that make our cars will have to “focus on this demand pool” because high-income earners will be the only buyers able to kick out a lot of dealerships in something new.

Smok says the affordability problem is “not the Fed’s fault” but a “side effect” of its attempts to control inflation.

But this effect, along with the crunch of the microchips, will be multiplied. “Transportation in the United States relies heavily on personally owned vehicles. Unfortunately, a growing percentage of the population is running out of affordable transportation options.”

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