Mad Money

Could the Fed have higher rates up its sleeve soon?

Cramer: Be ready to buy, not sell
Cramer: Be ready to buy, not sell

What the heck is going on when somehow a better economy means that investors should sell stocks? Jim Cramer is seriously confused as to why the market closed down on Monday on fears of growth and the idea that higher interest rates could be right around the corner.

On Friday, the market roared when it received excellent unemployment data, but then reversed when investors realized that it could mean that the Fed could raise rates sooner than initially anticipated.

"We've had many a Fed in the past that would have raised rates multiple times already based just on employment, and I think that would have crushed our growth and strangled the nascent economic rebirth post the great recession, However, this Fed, led by Janet Yellen, has actually been very smart," Cramer said.

The flaw in this argument is that the Fed isn't going to just raise rates dramatically at the closest whim of good employment numbers. It has said over and over again that it is data dependent.

It is not just taking into consideration employment; it also looks at inflation, industrial production, wages and other items such as the health of the global economy.

The Marriner S. Eccles Federal Reserve building at sunrise in Washington.
Andrew Harrer | Bloomberg | Getty Images

So, hypothetically speaking, what would happen if the Federal Reserve were to raise Fed fund rates to three quarters of a point, up from one quarter?

Cramer thinks the ripple effects of this action could be significant and send mortgage rates higher while making loans for businesses and construction companies more expensive. However, he reminded investors that plenty of economic expansions have occurred when rates were at 3 or even 5 percent.

"Now, if the Fed took rates up to those levels in a straight line, I think that could pose a real problem for the stock market. However, it's highly unlikely to actually happen," said the "Mad Money" host.

Cramer anticipates that while rates may rise eventually, they will do so gradually. Especially given how prudent the Fed has been so far.

There are various industries that will benefit ultimately if the Fed moves slowly and allows the economy to get stronger. That includes oil, which needs a stronger economy in order to meet the excess supply glut, or retail, which needs a strong economy in order to maintain a high supply margins for inventory.

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"I totally get the fear of the Fed. It's ingrained by all of the commentators. It's played a huge role in today's selling, even though we have to remember that we had a pretty historic 700- point gain in the Dow last week," said Cramer.

The day will come when the Fed raises rates, albeit at a slow pace. And when that occurs, Cramer wants investors to be ready to buy, not sell, on the positive implications for the market.

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