CARY, N.C. -

Three economists who regularly share their assessments with SubPrime Auto Finance News dissected the Federal Reserve’s actions this week, which at the conclusion of the regularly scheduled Federal Open Market Committee meeting included the raising of the federal funds rate by 25 basis points.

In unanimously approving the move, the Fed explained its stance of monetary policy remains “accommodative,” thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation,” the FOMC said. “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

“In light of the current shortfall of inflation from 2 percent, the committee will carefully monitor actual and expected progress toward its inflation goal,” the group continued. “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

“However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” the FOMC added.

Cox Automotive chief economist Tom Webb considered the Fed actions and focused his assessment more on the availability of credit, rather than the rate uptick.

“The quarter point rise in the targeted federal funds rate will not, in and of itself, have a direct negative impact on new or used auto sales or wholesale values,” Webb said. “For one, note that market-determined rates like the two-year and 10-year Treasury yields had already moved up significantly post-election.

“And remember, after the December 2015 Federal Reserve rate hike, market rates actually declined — with the benchmark 10-year Treasury yield falling to a record low 1.4 percent last summer,” he continued.

“Although we do not anticipate a similar response in the year ahead (indeed, rates are expected to continue to rise), it is an industry truism that ‘the availability of credit is more important than the cost of credit.’ And a steepening yield curve generally helps financial institutions and promotes lending,” Webb went on to say.

Webb closed his thoughts by pointing out that the auto finance industry shouldn’t just dust aside what the Fed does.

“There are, however, possible indirect negative impacts. Most notably, there is the possibility of an over-strengthening dollar and/or global financial market volatility,” he said. “Additionally, although the impact on residential real estate is also likely to be modest, there could be a more pronounced impact on commercial real estate where there is always large amounts of debt that needs to be rolled over.”

Comerica Bank chief economist Robert Dye recapped that in addition to the policy announcement, the FOMC also released a new set of economic projections and a new dot plot. Dye explained the economic projections show a slight increase in expected real GDP growth for 2017 and a slight decrease in the expected unemployment rate. He added the Fed’s inflation expectations were unchanged from September.

Dye went on to highlighted the new dot plot — which shows FOMC member’s expectations for the fed funds rate over the next few years — indicates that the FOMC now expects to raise the fed funds rate three times in 2017 and three times in 2018.

“It is purely speculative on our part to say that a reasonable pattern for the timing of fed funds rate increases for 2017 might be March 15, July 26 and Dec. 13 of 2017,” Dye said. “We will be adjusting our interest rate forecast for 2017 and 2018 upward slightly, based on the news from the Fed.”

Dye also noted that Fed chair Janet Yellen indicated in her last press conference of the year that her policy of data dependence would continue, 

“That is to say that the fed funds rate is not on a predetermined course and that economic conditions could change and expectations of future interest rate hikes could change as well,” Dye said. “She was careful not to specifically endorse a potential Trump Administration fiscal stimulus plan or tax reform strategy.

“Moreover, she was careful to restate previous statements about running a ‘hot economy,’ Dye continued. “She does not recommend letting the economy expand at a rate significantly above potential GDP growth for a period of time in order to absorb remaining slack. She restated her view that the Federal Reserve would eventually wind down its balance sheet by not reinvesting principle payments and rolling over maturing assets once the fed funds rate was well on its way toward normalization.”

Finally, Stifel Nicolaus chief economist Lindsey Piegza agreed with Dye’s summation of the Fed’s new dot plot.

“More importantly, however, the Fed’s longer-run outlook for growth and inflation was unadjusted, leaving the longer-term pathway for rates little changed,” Piegza said. “In other words, the committee sees the potential for a modest uptick in prices and activity over the next 12 to 24 months. 

“But in the long-run, the Fed’s forecast for a moderate (read: blah) trajectory of the economy remains,” she added. “Despite the market’s more optimistic view with pro-growth policies potentially ushered in next year, the Fed expects to maintain a slow and ‘gradual’ pace.