Jim Cramer of CNBC said Thursday it was a mistake to drop shares in response to the Federal Reserve’s decision to leave the interest rate unchanged.
He defended Fed Chairman Jerome Powell, who the day before kept the central bank’s goal of keeping short-term lending rates low to support the US economic recovery, even if inflation rises in the short term.
“Higher rates are bad for the economy. Powell doesn’t want us to take that hit if we don’t have to,” the Crazy Money host said. “He does not want his legacy to be the defeat of recovery … [not after he] acted so aggressively last year to prevent the economy from collapsing. “
The Fed cut rates last year in response to the coronavirus pandemic. Now, many market watchers are trying to anticipate the Fed’s next move as the economy gains grip.
The mandates implemented to slow the spread of Covid-19 have turned the economy around and put the unemployment rate in the country in the double-digit range. Since then, the unemployment rate has fallen to 6.2% since February, and Powell said the Fed will give priority to giving the labor market room for recovery.
“I think Jay Powell has a right to focus more on full employment than low inflation … I bet he’ll be right about the transient nature of rising commodity prices,” Cramer said.
“Wall Street got scared last year when Powell aggressively cut rates and is scared again now that it has decided to keep rates,” he added.
Although a low-interest environment is good for equities, not all equities are created equal, Cramer said.
Industrial firms are winners when rates are low, while rising names – especially those in technology that trade on future earnings expectations – are affected, as these subsequent profits are not as attractive if inflation consumes their value, he said.
The Fed now projects gross domestic product to improve by 6.5% this year, up from 4.2% in December. As the U.S. economy reopens and more consumers venture out, cyclical companies, such as travel, will benefit greatly, Cramer said.
“The Fed essentially says ‘Party on, industrials,’ which makes hedge funds buy them in hand,” the host said.
“The problem is that if they want to buy banks or smoke stocks, they have to sell something else,” he said, such as “the high-tech stocks they always throw away, and that’s called the hedge fund game.” .