The Federal Open Market Committee (FOMC) at the Federal Reserve raised the federal funds rate target to a range of 0.25 to 0.5%, marking the first push higher by policymakers in three years.

The move prompted Cox Automotive chief economist Jonathan Smoke to say Wednesday’s action is likely the first of seven increases by the FOMC this year, sharing in a blog post that his rate projections indicate that the target rate would be near 1.9% at the end of 2022 and then increase to 2.8% by the close of 2023.

After the Fed announced its action, chair Jerome Powell explained the committee’s reasoning for the near unanimous decision with one member wanting a full 0.5% rise.

“The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate,” Powell said in his opening statement of a press conference on Wednesday afternoon.

Economic activity expanded at a robust 5½ percent pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support and the healthy financial positions of households and businesses,” he continued. “The rapid spread of the Omicron variant led to some slowing in economic activity early this year, but cases have declined sharply since mid-January, and the slowdown seems to have been mild and brief. Although the invasion of Ukraine and related events represent a downside risk to the outlook for economic activity, FOMC participants continue to foresee solid growth.”

Powell discussed an important economic trend relevant to auto finance companies — employment.

“The labor market has continued to strengthen and is extremely tight,” Powell said. “Over the first two months of the year, employment rose by more than 1 million jobs. In February, the unemployment rate hit a post-pandemic low of 3.8 percent, a bit below the median of committee participants’ estimates of its longer-run normal level. The improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics.

“Labor demand is very strong, and while labor force participation has increased somewhat, labor supply remains subdued. As a result, employers are having difficulties filling job openings and wages are rising at their fastest pace in many years,” he continued. “FOMC participants expect the labor market to remain strong, with the median projection for the unemployment rate declining to 3.5 percent by the end of this year and remaining near that level thereafter.”

Powell also touched on another broad economic trend that’s moved higher in part because of the used-vehicle market.

“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” he said. “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability.

“As we emphasize in our policy statement, with appropriate firming in the stance of monetary policy, we expect inflation to return to 2 percent while the labor market remains strong. That said, inflation is likely to take longer to return to our price stability goal than previously expected,” Powell went on to say.

Like Smoke, Curt Long — who is chief economist and vice president of research at National Association of Federally Insured Credit Unions — is expecting interest rates to move higher for the remainder of the year and beyond.

“The actions taken by the FOMC were widely expected and the statement offered nothing surprising,” Long said. “The committee’s projections for the Fed funds rate target at year end made a dramatic shift from three rate hikes in the December version to seven this time around, which is in line with market expectations.

“Inflation shows no signs of slowing down, so credit unions should expect a steady pace of quarter-point hikes at every meeting through the rest of the year,” Long added.

In his Smoke on Cars blog post, the Cox Automotive chief economist elaborated about what the decisions by federal policymakers could do to vehicle sales and portfolio building.

With rates expected to increase by more than a point beyond the increases observed so far, financing costs will quickly make financing big-ticket purchases more challenging. This is exactly what the Fed wants to see. As demand for real estate and goods slows, the rate of price increases should slow as well,” Smoke said.

“For consumers planning to get the lowest possible monthly payments in 2022, the clock is ticking,” he continued. “Keeping terms, prices, and down payment assumptions constant, an increase in an auto loan rate of a full percentage point adds about 3% to a monthly payment on the average new vehicle. The impact on mortgages is twice as severe given the longer loan term. One percentage point increase on a mortgage rate adds 6% to the typical mortgage payment.

“The spring is looking much more attractive to buy a vehicle than in recent months despite the rate increases that have happened so far,” Smoke went on to say. “Measures of new and used prices have declined to start the year, and supply is relatively better than it was throughout the second half of last year. With supply likely to tighten in the months ahead with new production challenges emerging in Europe from the war in Ukraine and in China from surging COVID cases, prices are more likely to rise than fall, especially in the new-vehicle market.”

Comerica Bank chief economist Bill Adams offered this assessment after digesting what the Fed did this week and what Powell said, mentioning the possibility of a situation that’s not necessarily helpful for dealerships and finance companies.

“With interest rates set to rise quickly, the tailwind from fiscal stimulus waning, exports under pressure and higher oil and food prices hitting household budgets, it is much easier to imagine how another negative shock could push the U.S. into a recession sometime over the next 18 to 24 months,” Adams said. “This is why the yield curve is close to inverting. The risk of a recession is probably a one-in-three proposition over that timeframe.

“More likely, the current expansion will continue albeit at a slower pace, supported by U.S. consumers’ excess savings, recent years’ home equity and stock market gains which bolster household finances, and rising labor force participation as financially-strapped Americans look to supplement incomes,” Adams added.