Jim Cramer's guide to investing: Why the Fed matters

CNBC

6 hours ago

CNBC's Jim Cramer told investors that Wall Street is always looking for signals — especially from the Federal Reserve. While he said market action isn't always dictated by the Fed, stocks can be highly-reactive to the central bank when the economy is at an inflection point.
"When the Federal Reserve matters — when it's tightening too aggressively or when it's easing, it's about to start easing — well then it really, really matters," he said.
While the Fed can weaken the economy by raising interest rates, Cramer emphasized that it can also spur economic growth by cutting them. When the economy cools down, he said, the Fed will often stop hiking up rates and then start to bring them down. Cheaper overnight borrowing for banks mean that consumers and businesses have less incentive to save money and more incentive to spend or invest, Cramer said. Increased consumer spending and business growth create a "virtuous circle," Cramer said, as expanding companies hire and pay more employees who then go on to spend more money.
Once the Fed stats to cut, Wall Street hedge funds tend to follow the same "playbook," Cramer said. They sell recession-proof stocks like utilities and consumer staples, and they buy cyclical stocks, or ones that do well as the economy flourishes. However, he advised investors to be careful and keep a diversified portfolio during these economic rotations. He added that it's also wise to be cautious when trying to pick up stocks that have gone out of favor. Some hedge funds, he said, "don't want to fight the Fed in either direction" and won't stop selling an out-of-favor group because it's become too cheap.
According to Cramer, it's worthwhile to remember that Fed-induced economic changes can be reversed. However, he also said it can be difficult to discern when the Fed will change course, adding that central bank leaders can approach the job differently.
"Any problem that's man-made can be unmade," he said. "And you need to factor this into your calculus or you'll miss out on some really major moves."
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