When Federal Reserve chairman Jerome Powell was asked in March why U.S. consumers aren’t more upbeat, with the government’s monthly jobs reports showing pay raises exceeding the rate of inflation month after month for more than a year, he replied: “They’re not feeling good about it yet.”
After the Fed decided Wednesday to keep its benchmark interest rate in the range of 3.5% to 3.75%, Powell was asked at his likely final press conference as chairman what message he wanted to send to American families about inflation.
“We’re committed to bringing that down to 2%, and sustainably,” he said.
Powell no doubt meant what he said, but for the recreational boating industry, there appear to be no quick economic fixes to improve the public mood, boost sales and get existing boaters to spend lots more time on the water this spring and summer.
“Realistic upside catalysts are limited in the near term,” Brian Thompson, an investor and clinical professor of economics at DePaul University in Chicago, told Trade Only Today. “A quick resolution or de-escalation in the Mideast conflict that lowers gasoline and diesel prices would be helpful. In situations like this, stock market volatility can serve as a decent predictor of sentiment expectations, and the market does not currently appear to be pricing in a prolonged conflict in the region.
“Beyond that, a visible decline in core inflation that allows the Fed to begin cutting rates later this year could gradually improve sentiment and financing conditions,” Thompson added. “However, with the University of Michigan Consumer Sentiment Index at a record low near 50, a meaningful spring/summer rebound in discretionary big-ticket spending would likely require both lower energy prices and tangible progress toward the Fed’s 2% inflation target. Absent those developments, any improvement will probably be modest and slow.”
The April reading of the University of Michigan’s index, at 49.8, was the lowest ever for the 74-year-old measure. The Conference Board’s Consumer Confidence Index edged up by 0.6 points, to 92.8, this month, but the think tank said consumer spending trends this year remained focused on what it termed “cheap thrills” and necessary spending, not on expensive and discretionary consumption.
The University of Michigan survey focuses on personal finances and the cost of living. The Conference Board’s survey concentrates on consumers’ views about the job market.
Thompson said the boating industry should see the Fed’s decision to neither lower nor raise the federal funds rate as “continued restraint. Although interest rates are not high by historical standards, they remain elevated relative to post-pandemic levels. This keeps borrowing costs high for big-ticket durable goods typically financed through loans or floorplans.
“Consumer sentiment has also remained persistently low,” he added. “This matters because consumers tend to purchase expensive discretionary items only when they feel more optimistic about their economic future. Therefore, a combination of lower interest rates and greater consumer optimism would be far more supportive for large-ticket purchases, such as recreational boats.”
Thompson said the Fed made the right call to hold the federal funds rate.
“With ongoing geopolitical uncertainty from the Mideast conflict and its continued effects on energy prices and supply chains, maintaining the current target range of 3.5% to 3.75% is the prudent choice,” he said.
Shawn DuBravac, chief economist at the National Marine Manufacturers Association, told Trade Only Today that he agrees that the central bank “absolutely made the right decision in holding rates steady. The economy is still growing, inflation remains above target, energy prices are moving higher because of the Mideast conflict, and the outlook is anything but certain. The Fed recognizes it needs to remain data-dependent, and it needs more evidence before it can rule out rising inflation.”
The central bank was nearly unanimous in favoring a steady rate policy — Trump appointee Stephen Miran dissented in favor of a quarter-point rate cut — but Fed governors Neel Kashkari, Lorie Logan and Beth Hammack dissented from the decision and the accompanying policy statement because they opposed its wording, which suggests the Fed’s policymaking Federal Open Market Committee will continue to have a bias toward reducing the federal funds rate.
“The dissents reveal persistent internal division, with some members favoring a more dovish forward guidance,” Thompson said. “I think policy will continue to remain data-dependent and cautious, with fewer signals of imminent easing.”
Meanwhile, Kevin Warsh, President Trump’s nominee to succeed Powell as chairman, saw his nomination clear the Senate Banking Committee in a 13-11 vote Wednesday that advances his candidacy to the full Senate, which is expected to confirm him before Powell’s term as chairman ends May 15.
Powell, for his part, told reporters who cover the Fed that he will remain a central bank governor after his chairmanship ends, concerned that the legal attacks he said the Trump administration has leveled against the central bank are “battering the institution” and threatening its ability to function independently, able to make economic decisions without regard to politics.
His term as a Fed governor runs out at the end of January 2028. “I will leave when I think it is appropriate to do so,” he said.
Powell said he will keep a low profile after his chairmanship ends and will not be a “shadow chair” behind Warsh, interfering with the new chairman’s ability to lead.
“That’s just not something I would ever do,” he said.
Asked whether he believes Warsh can stand up to Trump, who has been pressuring the central bank with demands for steep rate cuts, Powell said, “He testified very strongly to that effect [at his confirmation hearing], and I take him at his word.”
The Fed’s next policymaking committee meeting is June 16-17.
“The dissenting votes might reflect disagreement about the signal the Fed is sending about [the next rate] decision, but I think it was more than that,” DuBravac said. “The dissenting votes were also a signal to Warsh that he will only be one vote among 12: the regional presidents who have signaled, in writing, that they are not eager to cut [rates] into a supply shock,” the global oil crisis caused by Iran’s closure of the Strait of Hormuz.
DuBravac said that although the current interest rate environment is marginally negative for the boating industry, two other forces are likely having a larger, near-term effect.
“First, uncertainty remains extremely high and continues to weigh on consumer psychology,” he said. “Consumers are willing to spend, but they remain price-sensitive and are likely looking for deals. Second, elevated gas prices are showing no signs of reversing.”
DuBravac said the “economy is resilient and still capable of growing above 2% this year. The industry does not need a major shift in the economy. Steady improvement in consumer sentiment would help boost the industry. Consumers are still reacting to price levels, not inflation rates, even though wages are growing and unemployment remains low.”
Workers’ pay again kept pace with inflation in March. The Commerce Department said today that the Personal Consumption Expenditures Price Index, the Fed’s preferred measure of inflation, rose 0.7% for the month and 3.5% year-over-year.
The annual increase matched the 3.5% year-over-year gain in wages for March that the Labor Department reported earlier this month in its latest jobs report. Core PCE inflation, which strips out the volatile food and energy sectors, rose 0.3% for March and 3.2% on a year-over-year basis.
Like DuBravac, former NMMA president Thom Dammrich saw the Fed’s rate decision as correct because of the uncertain economy.
“We should have a new Fed chair next month, and Warsh will likely be cautious,” Dammrich told Trade Only Today. “I am concerned we are just at the early stage of increasing inflation, and that is reflected in the dissenting votes by Fed governors who oppose language suggesting further rate cuts.
“And the divergence between manufacturing output (at a 47-month high) and consumer expectations (at an all-time low) does not bode well for the coming months,” he added. “We have only seen this kind of divergence four to five times in the past 50 years, and each time, a recession followed. Unfortunately, I think recreational boating can expect more of the same in the near and midterm. President Trump’s own team has acknowledged that if the Iran conflict ended today, gasoline prices would not come down before the end of the year.”
To improve consumer confidence, Dammrich said, “we need less geopolitical noise and a clearer inflation path. Just because inflation comes down doesn’t mean prices come down. They continue to increase but at a slower rate.
“Consumers are concerned more about price levels than about inflation, and that is what is throwing cold water on consumer spending,” added Dammrich, who is now an advisor at Global Marine Business Advisors. “Realistically, I don’t expect any news that will lift consumers’ spirits and boost the boating industry this spring and summer. The caveat to that is that upper-income consumers continue to spend, and with the stock market back in gear, I think the premium end of the market has cause for optimism this spring and summer.”
Drew Pope, president of the 16-member Independent Boat Builders Inc., told Trade Only Today that the Fed’s decision was unsurprising, “given the global economic uncertainty stemming from the conflict in Iran and the resulting oil and gas production constraints, with the annual [Consumer Price Index] inflation rate jumping to 3.3% in March and the April inflation numbers expected to be above 3.5%. The dissent by Fed [regional bank] presidents Hammack, Kashkari and Logan suggests any near-term rate cuts are unlikely, given rising inflation coupled with wider economic uncertainty, and their urging to steer clear from language suggesting there could be cuts this year sends a clear message to expected incoming chairman Kevin Warsh that the Fed governors will follow established monetary policy to control inflation first and foremost.
“As I mentioned earlier this year, a 25- or 50-basis-point rate move is unlikely to turn the tide in our industry in a meaningful manner,” he added. “Boatbuilders should continue to be disciplined, keeping a weather eye on field inventories and retail sales numbers coming into the height of the selling season.”
Echoing Dammrich and DuBravac on what is driving consumer concerns, Pope said he and other industry leaders with whom he has spoken strongly believe this statement: “Our industry does not face an immediate borrowing-rate problem; we have an affordability problem — and rising inflation is fuel on that fire.”
“Another key tailwind we needed this selling season was reduced uncertainty or volatility. Last year we had tariffs; this year we have the Iranian conflict and rising oil prices,” Pope said. “With consumer sentiment hitting record lows at the worst time for our industry, we expect the market to remain flat year over year.
“Builders and dealers must remain optimistic that the consumers who make up the upper segment of our K-shaped economy have remained insulated and will return to the market to purchase a new boat, whether this conflict is resolved or not,” he added.
