A soft landing?
On Dec. 13, the Fed held its key interest rate steady, at 5.5%, for the third consecutive meeting. Powell announced “very good news” that “inflation has eased from its highs” and “without a significant increase in unemployment.”
Since March 2022, the Fed has hiked interest rates 11 times — from 0.25% to 5.5% — to tame rampant inflation. This aggressive action — while painful for U.S. consumers as it has increased the cost of borrowing — has lately coincided with a falling inflation rate from 8.5% to 3.1%.
“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic and ongoing progress towards our 2% inflation objective is not assured,” said Powell.
“We're committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2% over time and to keeping policy restrictive until we're confident that inflation is on a path to that objective.”
That being said, members of the Federal Open Market Committee (FOMC) suggested there could be at least three interest rate cuts in 2024 — and Cramer has taken this as a win.
“J Powell got us to land softly,” he said — attributing that partly to the nation’s “strong, tight labor market.”
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Stock market response
The markets “reacted appropriately” to the Fed’s interest rate hold, according to Cramer. The Dow Jones Industrial Average gained 512 points, or 1.04%, to close at 37,090.24 — a new all-time high. Meanwhile, the S&P 500 climbed 1.37% and the Nasdaq Composite jumped 1.38%. All three major averages hit 52-week highs.
“This is the phase … the bulls were waiting for,” Cramer said. “It’s the comeuppance for the myriad bears who never embraced the possibility that Powell could engineer a soft landing — a terrific soft landing.
“Those bears are now trapped. There’s nothing they can do except try to rip their legs out of the jaws of those bear cuffs. Good luck — I’m told those things really hurt.”
Cramer said that if the Fed delivers three rate cuts in 2024, “bonds would lose their attractiveness versus stocks real fast.”
In particular, he’s bullish about “economically sensitive” stocks like banks — he names JPMorgan (JPM), Morgan Stanley (MS) and Wells Fargo (WFC) as three favorites — used-car dealers like CarMax (KMX) and potentially even homebuilders like DR Horton (DHI).
Cramer posed a question to his viewers: “Should you strap yourself to the bullish mast and not listen to those who are doubling down on negativity — the ones who say we’re headed for a hard landing, despite all the evidence to the contrary?”
His response was clear: “Yes!”
An ‘alarming’ prediction
Musk’s comment about Cramer’s prediction being “alarming” plays into the “inverse Cramer” narrative. This stems back to the financial crisis of 2008, when the TV host’s stock picks were criticized for not performing well during the market downturn. Investors started betting against Cramer’s advice, which some felt was overhyped and too focused on short-term trends.
If you’ve ever watched “Mad Money,” you’ll know that Cramer thrives on hype — that’s what gives his show such fast-paced excitement.
But maybe he was a little premature with his soft landing celebrations. As Powell pointed out, the Fed is still a long way from meeting its 2% inflation target — and the central bank is “prepared to tighten policy further if appropriate.”
Many economists and investment analysts expect the country to dodge a recession in 2024, even as growth slows in the first half of the year — but the economic landing will likely rely on how successful the Fed’s ongoing rate policies are.
Jesse Rothstein, professor of public policy and economics at the University of California Berkeley, told States Newsroom: “If inflation is coming down and unemployment isn’t going up, and they can continue this tight roadblock, I think we’ll see the economy cooling off a bit and wages continuing to increase, to catch up to the inflation that we saw over the last couple of years, but not dramatically outpace that.
“If they’re not successful, the risk is that they overtighten and tip us over into a recession.”
Before jumping on the “bullish mast,” as Cramer put it, you may want to observe how the U.S. economy responds to this latest Fed announcement for a little longer.
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