Last week, members of the Federal Open Market Committee voted unanimously to keep interest rates unchanged, at a range of 1.75% to 2%. Members also issued a statement indicating the Federal Reserve is on track to raise rates in September and December. These hikes follow two rate increases previously enacted this year. The Federal Reserve’s statement and testimony by Chairman Jerome Powell touched on four key areas.
- Inflation
While the economy grew by 4.1% in the second quarter, the year-end forecast remains at a 3% overall growth rate, which is in the Federal Reserve’s predicted range. However, concerns about rapid wage escalation and consumer prices are prompting some fears of increased inflation. The good news is the agency believes “risks to the economic outlook appear roughly balanced.”
- Trade
Tariffs and potential trade wars are frequently in the news, but the Federal Reserve has not seen any hard data to warrant action. Acknowledging that trade rhetoric can hamper near-term forecasting, the agency has not seen the specific impact to investment and growth.
- Rate Increases
Reinforcing that two rate hikes are forecasted for the remainder of the year, the Federal Reserve did not specify the percentage. The statement relied on words such as gradual and guidance to reflect a wait-and-see approach.
- Politics
Chairman Powell was firm in his testimony to Congress that the Federal Reserve is an independent agency that responds to economic data, not political pressure.
Reading the Tea Leaves
Given these statements and annual mid-year forecasting, what steps should lenders take to capitalize on market opportunities in the second half of 2018?
Used-Vehicle Inventory
Thanks to last year’s hurricane and fire disasters, the inventory for used vehicles is tighter than recent years. Consumers are also keeping their vehicles past the pay-off date, further constricting supply. Higher inflation and pending interest rate hikes will likely drive more consumers in both prime and subprime credit tiers to purchase used, off-lease, auctions, or private sales. Financing these vehicles offers opportunities for auto lenders. Be sure your current and potential bank customers are aware of your auto loan services. Make sure your dealer partners understand your criteria for used-vehicle auto loans to increase your look-to-book in this segment.
Value of the Dollar
Monetary policy and the rate of inflation are not the only things that impact the value of the dollar. Loan terms and credit scores are two important factors that consumers often misunderstand. Take the opportunity to provide some Economics 101 education – both to consumers and to dealership partners. The Federal Reserve has provided solid guidance and consumers can expect the value of their dollar to decrease in the second half of the year. Make sure that the dealer partners have good speaking points on the benefits of purchasing a vehicle now before rates increase. Offer consumers guidance on a used vehicle versus a new vehicle financing. This includes the size of the down payment and loan term options. Lastly, educate consumers on the value of vehicle protection products as an inflation hedge.
While no one can predict the future with complete accuracy, the tea leaves surrounding monetary policy are certainly available. Careful planning, education and taking advantage of opportunities can turn the reading in your favor.
With more than 40 years helping clients in the retail automotive industry navigate shifting economic tides, EFG Companies knows how to increase loan volume regardless of rate increases. Contact us today to find out how.
