CNBC’s Jim Cramer said Thursday it is a mistake to take action in reaction to the Federal Reserve’s decision to leave the interest rate unchanged.
He defended Fed Chairman Jerome Powell, who the day before had kept the central bank’s goal of keeping short-term debt rates low to support the U.S. economic recovery, even if the inflation rises in the short term.
“Higher rates are bad for the economy. Powell doesn’t want us to have that success if we don’t have to,” the Mad Money host said. “He doesn’t want his legacy to be provoking recovery … [not after he] he acted so aggressively last year to keep the economy from crashing. “
The Fed cut rates last year in response to the coronavirus pandemic. Now many market watchers are trying to anticipate the Fed’s next step as the economy gains strength.
The mandates established to curb the spread of Covid-19 altered the economy and placed the country’s unemployment rate in a double-digit range. Since February, the unemployment rate has fallen to 6.2% and Powell said the Fed would prioritize the labor market recovery.
“I think Jay Powell’s right to focus more on full employment than low inflation … I bet he’ll be right about the transitory nature of commodity price increases,” Cramer said.
“Wall Street freaked out last year when Powell aggressively cut rates, and they’re freaking out again now that it has decided to keep rates low,” he added.
While a low interest rate environment is good for stocks, not all stocks are created equal, Cramer said.
Industrial firms earn when rates are low, while growth names, especially tech ones operating in anticipation of future gains, are affected because those subsequent profits are not as attractive if inflation eats up their value, he said.
Now the Fed expects gross domestic product to improve 6.5% this year, compared to the 4.2% projection it made in December. As the U.S. economy reopens and more consumers venture out of the home, cyclical businesses, such as travel, will benefit greatly, Cramer said.
“The Fed basically says,‘ Party on, industrials, ’which causes hedge funds to buy them by handing them over,” the host said.
“The problem is that if they want to buy the banks or the shares of the smoker … they need to sell something else,” he said, such as “the high-growth technology stocks they always pour, and that’s called the book of hedge funds “.