CNBC’s Jim Cramer said on Thursday it was a mistake to dump shares in response to the Federal Reserve’s decision to leave the interest rate unchanged.
He defended Fed Chairman Jerome Powell, who upheld the central bank the previous day in keeping short-term lending rates low to support the US economic recovery, even as short-term inflation increases.
“Higher rates are bad for the economy. Powell does not want us to strike a blow if we do not have to,” the ‘Mad Money’ host said. “He does not want his legacy to be the recovery … [not after he] acted so aggressively last year to prevent the economy from collapsing. ‘
The Fed lowered rates last year in response to the coronavirus pandemic. Now many market watchers are trying to anticipate the next step from the Fed as the economy gets traction.
Mandates set to slow the spread of Covid-19 boosted the economy and reached the country’s double-digit unemployment rate. The unemployment rate has fallen to 6.2% since February, and Powell said the Fed would give priority to giving the labor market room to recover.
“I think Jay Powell’s right to focus more on full employment than on low inflation … I bet he’s right about the short-lived nature of commodity price increases,” Cramer said.
“Wall Street cut down last year when Powell aggressively lowered tariffs, and they have been frustrated again now that he has decided to keep tariffs low, he added.
While a low interest rate environment is good for equities, not all equities are equal, Cramer said.
Business enterprises are winners when rates are low, while growth names – especially those in technology that deal with future earnings expectations – come under pressure because later profits are not as attractive as inflation utilizing their value.
The Fed now predicts that gross domestic product will improve by 6.5% this year, compared to a 4.2% forecast it made in December. As the U.S. economy reopens and more consumers venture more outside the home, cyclical companies, such as travel, will benefit greatly, Cramer said.
“The Fed basically says ‘Party on, industrial’, which causes the hedge funds to buy their hand over the fist,” the host said.
“The problem is that if they want to buy the banks or the smoking stocks … they have to sell something else,” he said, “like the high-growth technology stocks they always dump, and it’s called the hedge fund playbook. .