CNBC’s Jim Cramer said Thursday that it was a mistake to dump stocks in response to the Federal Reserve’s decision to leave interest rates unchanged.
He defended Fed Chairman Jerome Powell, who the day before insisted on the central bank’s goal of keeping short-term interest rates low to support the US economic recovery, even as inflation picks up in the near term.
“Higher rates are bad for the economy. Powell doesn’t want us to take that blow if we don’t have to,” said the host of “Mad Money.” “He doesn’t want his legacy ruining the recovery … [not after he] acted so aggressively last year to keep the economy from collapsing. “
The Fed lowered rates last year in response to the coronavirus pandemic. Now many market observers are trying to anticipate the Fed’s next move as the economy gains momentum.
Mandates put in place to slow the spread of Covid-19 rocked the economy and put the country’s unemployment rate in double digits. The unemployment rate has fallen to 6.2% since February, and Powell said the Fed would prioritize giving the labor market room to recover.
“I think Jay Powell has the right to focus more on full employment than on low inflation … I bet he will be right about the transitory nature of commodity price increases,” Cramer said.
“Wall Street panicked last year when Powell aggressively lowered rates, and they are panicking again now that he has decided to keep rates low,” he added.
While a low-interest environment is good for stocks, not all stocks are created equal, Cramer said.
Industrial companies win when interest rates are low, while growth names – especially those in technology that act on future earnings expectations – are hit because those later earnings aren’t as attractive when inflation gobbles up their value, he said.
The Fed now expects gross domestic product to improve by 6.5% this year, compared to a forecast of 4.2% in December. As the U.S. economy reopens and more consumers are venturing out more, cyclical businesses, such as travel, will benefit greatly, Cramer said.
“The Fed is basically saying, ‘Party on, industrials,’ which makes the hedge funds buy them hand over hand,” said the host.
“The problem is, if they want to buy the banks or the chimney stocks … they have to sell something else,” he said, like “the high-growth technology stocks that they’re always dumping, and that’s called the hedge fund playbook.”