The Federal Reserve announced its second straight rate cut Wednesday, and that recent developments in the subprime auto market have drawn its attention.
After the conclusion of the Federal Open Market Committee meeting, the Fed stated it was dropping its target rate range by 25 basis points to 3.75 to 4 percent. Rates have dropped half a point since September with the second rate cut of the year.
The rate cut was made while the economy has seen a shift in the labor market, and inflation remains just under 3 percent.
“With the challenging situation, there is no risk-free path to policy as we navigate between our employment and inflation goals,” said Federal Reserve Chairman Jerome Powell. “Our framework calls for us to take a balanced approach in promoting both sides of our dual mandate. With downside risks to employment increased in recent months, the balance of risk has shifted. Accordingly, we judged it appropriate at this meeting to take another step toward a more neutral policy stance.”
The last employment data from the Bureau of Labor Statistics in September, before the government shutdown, showed unemployment at 4.3 percent and just 22,000 jobs added in August. That data followed the Bureau of Labor Statistics’ revision to its employment numbers from April 2024 to March 2025, showing the economy added approximately 900,000 fewer jobs than originally reported.
Powell said the Fed continues to pool data from a variety of sources during the shutdown, and it continues to point to a softening labor market.
“There are [multiple things] affecting the job market,” Powell said. “One is just a dramatic reduction in the supply of new workers. There is declining labor force participation and then declining immigration, a big policy change that began in the last administration and has been accelerated. A big part of the whole story is the supply side story. In addition, labor demand has declined. The unemployment rate has gone down. Meaning the demand for workers has gone down a little more than the supply.
“You saw in the last two meetings, it was appropriate for us to react by supporting demand with our rates. We have done that. We reduced rates… That should help, so at least the labor market doesn’t get worse, but it is a complicated situation.”
The total annual inflation rate was at 2.8 percent, with the core inflation minus the volatile food and energy prices also at 2.8 percent.
Powell suggested that without tariffs in place, the rate would be closer to 2.3 or 2.4 percent.
“The price increases are due to tariffs,” Powell said. “The good news, the costs of housing services are coming down and services other than housing are moving sideways. Inflation away from the tariffs is not far from 2 percent.”
Powell added that the inflation from tariffs is a one-time impact. But he also understands continued consumer concern about higher prices.
“There will be some additional increased inflation, because it takes a while for tariffs to work their way through the production chain, and finally get to consumers,” Powell said. “We see this now from the tariffs that were put in place many months ago. We are seeing those effects.
“But then, as all the tariffs are in, they stop generating inflation. You have a one-time price increase. This is how we believe and hope that it will work out. Once the last tariff is put on something, at that point it becomes a higher price level, but it stops going up. Prices stop going up… Now, consumers are not interested in that story. Their prices are higher. More than that, the reason they are so unhappy about inflation is the inflation we had in 2021, 2022 and 2023. You can say prices aren’t going up as much, but that doesn’t mean that people aren’t feeling those higher prices from the inflation we had two or three years ago. They are, and that is why a large part of the public, if you sample people, inflation is still very much making people unhappy. It is nice that prices are not going up as fast as they were, but they are still much higher than they were.”
There is no guarantee that another interest rate cut will come in December at the next FOMC meeting. Powell said there was some disagreement at this meeting among the committee about this latest cut.
“There are strong voices across the committee with differing views,” Powell said.
Used vehicle loan rates remain elevated. According to the latest estimates from Cox Automotive, the average used rate is 14.24 percent. The average new loan rate is 9.6 percent. Both have increased since July.
Powell addressed rising delinquencies in the subprime auto market and recent bankruptcies of some lenders in the sector. According to Fitch Ratings, the subprime 60-day delinquencies are at 6.5 percent.
“We watch the credit conditions very carefully. We have seen rising defaults in subprime credit for some time now,” Powell said. “Now you have seen a number of subprime automobile credit institutions having significant losses, and some of those losses are showing up on the books of banks. We are looking at it carefully. We are paying close attention.”
