The Federal Reserve Board’s decision to raise the discount rate by three quarters of point this point, tightens the links between the auto industry and affluent retail customers.
After the Fed announced the rate increase, which will have major impact on lenders of all sorts, according to analysts at Cox Automotive.
“With additional rate increases expected by year-end, new-vehicle demand may not hold up when production and product availability improve. That could mean the market will likely see the return of discounting and incentives,” said Jonathan Smoke, Cox Automotive chief economist.
Cautious optimism prevails in auto business
Smoke, however, cautioned it is not a given that higher rates will lead to lower new-vehicle sales, especially as the market remains supply constrained and shifts to producing more electric vehicles.
“As the new market has become more concentrated in higher price points, the industry benefits from primarily selling to higher income and higher credit quality buyers who are less likely to lose jobs in recessions and enjoy much lower rates when they choose to finance,” Smoke wrote in a blog post.
“With prices at record highs and rates heading higher, the new-vehicle market will behave like a de facto luxury market for the foreseeable future.”
Instead, car makers are still trying to work around supply chain constraints rather than the threat of recession sweeping over the business.
However, Ford Motor Co. said this week inflation-related supply costs — the target of the Fed’s rate increase — will be “$1.0 billion above plan” for the third quarter, ending Sept. 30.
Ford acknowledges new supply problems
Ford also expects to have about 40,000 to 45,000 vehicles in inventory at end of third quarter lacking certain parts presently in short supply.
The company said the vehicles lacking parts disproportionately include high-demand, high-margin models of popular trucks and SUVs. Their delayed sale will shift some revenue and earnings to the fourth quarter.
Ford again affirmed its expectation for full-year 2022 adjusted earnings before interest and taxes of between $11.5 billion to $12.5 billion, despite limits on availability of certain parts as well as higher payments made to suppliers to account for the effects of inflation.
Ford now anticipates third quarter adjusted EBIT to be in the range of $1.4 billion and $1.7 billion. The company intends to announce full third-quarter 2022 financial results — and provide more dimension about expectations for full-year performance — on Wednesday, Oct. 26.
“The Fed has been delivering a ‘tough love’ message that interest rates will be higher, and for longer, than expected,” Bankrate.com’s Greg McBride wrote in a note released Monday. “The Fed will continue to hike rates until it actually restrains the economy and intends to keep rates at those restrictive levels until inflation is unmistakably on its way to 2 percent.”