Why Did Car Sales Not Decline When the Fed Raised Interest Rates?

Apollo Chief Economist

Autos are usually one of the most interest-rate-sensitive sectors in the economy. When the Fed raises interest rates, you would expect car sales to decline.

But that is not what has happened during this cycle.

Instead, car sales have been going up despite the Fed raising interest rates from zero to 5.5% over a short period.

The source of strong demand for cars has been robust income growth, low unemployment, households having excess savings after the pandemic, and significant increases in stock prices and home prices, leading to a higher share of cars purchased with cash.

Combined with the Fed now cutting interest rates, the outlook for car sales continues to be strong, see also the steady increase in car sales since the Fed began to cut interest rates in September.

When interest rates go up, car sales should go down. But that is not what has happened.
Source: WARD’s Automotive Group, Bloomberg, Apollo Chief Economist

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