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Fed Cuts Rates a Quarter Point, Powell Says Policy in Good Place
Federal Reserve officials reduced interest rates by a quarter-percentage point for the third time this year and signaled a pause in further cuts unless the economic outlook changes materially.
The Federal Open Market Committee altered language in its statement following the two-day meeting Wednesday, dropping its pledge to “act as appropriate to sustain the expansion,” while adding a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate.”
“We believe monetary policy is in a good place,” Fed Chairman Jerome Powell said at a news conference following the decision. “We see the current stance of policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”
As with the September statement, the FOMC cited the implications of global developments in deciding to lower the target range for the central bank’s benchmark rate to 1.5% to 1.75%. Powell also noted in the press conference that the risks associated with trade tensions and Brexit show signs of improving.
Prolonged Hold
“His comments suggest the Fed is on hold for some time until something changes their outlook,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. “He’s still being quite optimistic, I think, particularly about the household sector. That suggests to me the Fed is quite comfortable with what they’ve done so far.”
Ten-year Treasury yields fell to 1.77% from 1.80% earlier, stocks closed slightly higher and the U.S. dollar gained. Traders also pared bets on a fourth consecutive rate cut in December.
Treasuries initially weakened on the Fed’s announcement but then took heart after Powell signaled that there was a high bar to raising rates because inflation remains muted.
“We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns,” Powell said.
While lower rates do little to combat the uncertain trade picture, unemployment has continued to drop, consumer spending has remained solid and more-affordable mortgages have revived the housing market.
“What we’ve had is an economy where the consumer is really driving growth,” Powell said. “Overall, we see the economy as having been resilient to the winds that have been blowing this year.”
What Our Economists Say
“The October FOMC post-meeting communique proffered the possibility of additional policy easing, but dialed back the degree of certainty through subtle language changes. This is consistent with Bloomberg Economics’ expectation that officials would aim to preserve optionality around upcoming meetings, even though we expect tepid economic data to ultimately compel the Fed to act.”
— Carl Riccadonna, Andrew Husby and Eliza Winger. To see the full note, click here
Hours before the decision, the Commerce Department reported the economy grew at a 1.9% annualized pace in the third quarter, exceeding estimates. Better-than-expected consumer spending was partly offset by weakness in business investment.
The Fed’s cuts have also calmed markets compared with the beginning of the year when investors grew nervous that monetary policy was too tight. Pricing in fed funds futures implies investors don’t fully expect another reduction until well into 2020.
The same cannot be said for President Donald Trump, who has repeatedly attacked the Fed. He complained on Tuesday that it “doesn’t have a clue!” and has called on Powell to slash rates to zero while tweeting favorably about negative rates applied by central banks in Europe and Japan.
Dissenting Votes
As with the past two cuts, Kansas City Fed President Esther George and Boston’s Eric Rosengren dissented, preferring to keep rates unchanged.
The FOMC didn’t release a new set of economic forecasts and rate projections at this meeting, so it’s unclear how many non-voters on the committee had also penciled in a reduction.
The statement again highlighted the essentially positive condition of the U.S. economy. With unemployment at a half-century low, officials continued to describe the labor market as “strong,” job gains as “solid” and household spending as rising at a “strong pace.”
Uncertainties Remain
At the same time, they repeated a reference to “uncertainties’’ in the economic outlook. Officials also made a minor change to say business fixed investment and exports “remain weak.” The prior statement had said that they weakened.
That softness has shown up in data from the manufacturing sector this year, though factory output rose slightly in the third quarter.
Fed officials have been watching for signs that weakness in manufacturing and faltering confidence in the business sector might threaten consumer spending, particularly if the job market cools. The Labor Department will release its October employment report on Friday.
— Christopher Condon and Steve Matthews (Bloomberg)
Chicago Fed debunks looming recession forecast
LAS VEGAS – The auto finance industry can breathe a sigh of relief as the Federal Reserve Bank of Chicago’s William Strauss discounted the likelihood of a recession to start next year.
“What causes us to go into a recession is some sort of bad event… and it has to be a bad economic event that it rises to the level that it can take down overall activity in the United States,” Strauss, the senior economist and economic advisor, said during the Auto Finance Summit economic forecast. “Right now I’d say we haven’t seen such events,” he noted, adding that such events in the past include the housing bubble burst in 2008, Sept. 11 in 2001, and the start of the U.S. war in Iraq in 1991.
The U.S. economy has experienced a growth period, at an average pace of 2.3%, that has lasted 10 years. In fact, “the outlook is for the growth to continue,” Strauss said. Almost all real-side economy sectors still have room to expand, he noted. “There’s still slack in the economy and, therefore, there’s less of a risk of a downturn coming from within the United States.”
Digital lending fintech enters auto
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A lenders guide to refund fees and charges of ancillary products
Ancillary products are under scrutiny by attorneys general, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. These regulators are evaluating creditors’ policies and practices related to refunds of ancillary products upon early termination of the underlying contracts.
Many ancillary products are statutorily governed as insurance, and there are legal obligations that borrowers receive refunds of unearned premiums — though no particular party is bound to make those refunds. Once ancillary products are financed, states regulate the transactions. Many states require borrowers to request refunds upon termination of the underlying contracts or require creditors to notify dealers or providers when refunds are due. Other states require creditors to initiate refunds upon early termination of the underlying contracts.
State attorneys general regulate creditors in consumer finance transactions, but not insurance companies, dealers or ancillary product providers. Therefore, regulators mandate creditor responsibility to ensure that consumers receive refunds. Creditors may work with dealers or providers to process refunds, but regulators hold lenders responsible for accuracy and completion of the actual refund.
Mere notification of prepayment to dealers or providers will not relieve creditors of refund obligations. Ultimately, creditors are responsible to ensure that consumers have received their refunds. The best evidence for lenders — in case of an audit — are copies of the canceled refund checks.
To that end, creditors should follow up with providers and dealers when refund obligations are contracted out. If the dealer or provider can’t provide evidence of the return, the creditor may refund the consumer directly and “true-up” with the dealer or provider on a predetermined basis. In other words, the amount that the creditor refunds the consumer would be deducted from any amounts that the creditor owes the dealer in the regular course of business.
When creditors are unable to deliver refunds to consumers, they must report and deliver the refunds to the state’s unclaimed property authority. Creditors’ obligations to refund property in their possession may extend as far back as the effective date of the refund requirement statute, and unclaimed property laws are not subject to statutes of limitation.
Kristi W. Richard and Jean-Paul “J-P” Perrault are members in McGlinchey Stafford’s Baton Rouge, La., office. Kristi can be reached at krichard@mcglinchey.com or (225) 382-3704. J-P can be reached at jperrault@mcglinchey.com or (225) 382-3641. McGlinchey Stafford is the Compliance Partner of Auto Finance Excellence (AutoFinanceExcellence.org), a sister service of Auto Finance News.
Ford Credit increases cash distribution
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SoftBank said to be behind Fair’s downsizing decision
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Fair, the high-flying industry startup, initiates substantial staff cuts
Fair, which offers an automotive subscription app, will reduce its staff by 40% in an effort to increase profitability, according to an internal company memo sourced by TechCrunch.
TechCrunch estimated that 215 employees would lose their jobs at Fair.
Among the employees let go is Chief Financial Officer Tyler Painter, brother of Chief Executive Scott Painter, who signed the memo. Kirk Shryoc, managing partner and co-founder of Hard Right Solutions LLC, a software and consultancy firm, and an investor in startups, will step in as the company’s interim CFO. It could not be determined at press time whether Shryoc is an investor in Fair.
To date, Fair has raised more than $2 billion of venture funding, more than any other auto finance startup to date. Softbank, the venture firm behind WeWork and Uber, is among Fair’s largest investors. Ally Financial has also provided Fair with a $100 million credit facility. According to published reports, the company has a current valuation of approximately $1.2 billion.
The job cuts come one month after Mizuho Bank backed the three-year-old startup with a $500 million revolving credit facility.
In what is described as “proactive steps” to ensure the Fair’s future as a profitable public company, Painter said the remaining resources will be focused on “strengthening Fair’s core technology and reducing costs associated with the capital-intensive supply side of our business.”
Moving forward, Painter said the company will spend the next few months to “transform the supply side of our business” while building a profitable model.
Since its inception in August 2017, Fair has provided cars for 45,000 users through its 3,000 dealer partners in 30 markets across the country.
The job cuts appear to be already limiting some of Fair’s business operations. Auto Finance News has learned that Fair’s “Escalation Department” in Phoenix, which fields some customer service inquiries, was closed today. It is not common for that department to be closed on a Thursday.
Additionally today, two Fair executives — Chief Product Officer Jay Trinidad and Chief Strategy Officer Craig Nehamen — dropped out from speaking engagements next week at the 2019 Auto Finance Summit in Las Vegas, according to an email sent to AFN by Rebecca Brancato, an executive assistant at Fair.
Fair was not available for comment at press time.
Vote for AFN’s inaugural Executive of the Year
As yearend approaches, we at Auto Finance News are reaching out to readers to vote for the inaugural Auto Finance Executive of the Year award, celebrating the highest achievement in the auto finance industry.
The 2019 Auto Finance Executive of the Year will be named and profiled on the cover of the December issue of Auto Finance News. The award is presented for the notable contributions made to the industry during the calendar year. We will also highlight several Executives to Watch in 2020.
Please vote by clicking here.
As the flagship publication for the auto finance industry, we are thrilled to recognize auto finance leaders in our yearend issue, but we want to have your input as well.
The final decisions will be based partly on the input received by you, our readers. The goal of this initiative is to celebrate auto finance and to set the bar for great achievement in the industry. We hope this effort acts as a continuing catalyst for industry growth and innovation.
Below is the list of five finalists for the 2019 Auto Finance Executive of the Year:
- Ian Anderson, Group President, Westlake Financial
- Dan Berce, President and CEO, GM Financial
- Renee Horne, Vice President, Consumer Lending Experiences, USAA Federal Savings Bank
- Chuck Jones, Head of National Indirect Lending, SunTrust Banks
- Ian Smith, CEO Americas Region, BMW Financial Services
Respondents may also nominate write-in candidates from finance companies.
Please note that executives are not permitted to nominate themselves. Also, each industry member is permitted to vote only once. All responses will remain confidential.
Nominations may be submitted until Friday, Nov. 1, 2019. Any questions regarding the survey can be directed to Nicole Casperson at ncasperson[at]royalmedia[dot]com.
NextGear Capital sues defunct dealership for floorplan default