Fed might cut interest rate to zero, experts say

The Federal Reserve's decision to cut the benchmark interest rate half a percentage point early this month was probably just a first step, analysts and economists say. To reduce the risk that the coronavirus will trigger a recession, analysts are predicting the rate — which directly impacts auto finance interest rates — will drop to zero.

The Fed slashed its benchmark rate March 3 — the first emergency move since 2008, during the financial crisis — to its current range of 1 percent to 1.25 percent.

Jonathan Smoke, chief economist at Cox Automotive, said the Fed could cut rates by an additional quarter point or half point by next month — or even take it down a full point to zero.

"Cancellations and closings are stacking up, and the U.S. is seeing its first quasi-quarantine in New Rochelle," Smoke said last week. "Those are important developments leading to declining consumer confidence and rising risk of recession."

Wall Street analysts at J.P. Morgan Chase and Bank of America Global Research predict the Federal Open Market Committee will take the rate to zero when it meets this week or during the second quarter.

Smoke is skeptical rate cuts will boost auto demand. The average advertised rate has come down just 0.05 percentage point following the first cut, he said, and a recession spurred by coronavirus concerns could mean an uptick in bankruptcies and defaults.

Analysts already expect new-vehicle sales to slide this year as economic growth slows and rising prices force consumers to consider used cars.

Supply chain disruption and consumer confidence concerns likely will slow sales even further, but Smoke says demand is strong for used vehicles — particularly during the spring when tax returns are issued.

"Consumers need transportation and are flush with cash. The used market in particular will likely see a strong and relatively normal spring," Smoke said. "It's the new market that is likely to be more volatile."