Cramer cautions against trading stocks every time Fed chief 'opens his mouth'

  • CNBC's Jim Cramer analyzes the Federal Reserve's latest interest rate hike and tells investors not to be worried about an economic slowdown.
  • The key to insulating your portfolio against rate hikes is diversification, the "Mad Money" host says.

With Wall Street parsing every word of the Federal Reserve's statement announcing its latest interest rate hike, CNBC's Jim Cramer wanted to bring investors back to earth as the market reacted to the news.

"Based on the action today and what I know about Fed Chief Jerome Powell, I think the big sellers ... might be making a bit of a mistake," the "Mad Money" host said on Wednesday.

"I'm not saying 'In Fed we trust.' That's not me. That's what got the bulls burned. I say 'In Fed we trust, but verify,' and so far, that verifying makes me think that you'll be safe if you sit tight with a diversified portfolio rather than flitting in and out of stocks every time Jay Powell opens his mouth," he continued.

A diversified portfolio will always help investors in the wake of Fed rate hikes because it serves as a hedge for how Wall Street interprets the central bank's moves, Cramer explained.

Typically, higher interest rates slow the economy and a slower economy tends to hurt profits, which on Wednesday led some money managers to sell industrial stocks and rotate into stocks that do well when the economy slows, like the health care cohort.

But on the other side of the trade were money managers who didn't think the Fed's hike would have such a drastic impact and bought into sectors that had been performing strongly before the hike, like technology and retail.

"Chairman Powell's like a pilot and the economy's his plane. A good pilot doesn't want to crash the plane in order to land. But a lot of Wall Street guys don't believe that's even possible," Cramer said. "Other managers [...] think it's business as usual. This is the 'In Fed we trust' camp that got overwhelmed, but not across the whole market."

Most of all, the "Mad Money" host didn't want investors to worry that the latest uptick in interest rates meant that we were headed for a recession.

"Short-term interest rates are still at such low levels, just 2.25 percent, that the bulls simply don't believe a quarter-point tightening can derail the economy," he told viewers.

"And, look, they're doing the right thing," he added. "The Fed recognizes that we're headed for full employment — in fact, we may already be there as we're literally running out of able-bodied ... workers in some parts of the country. And once you hit full employment, well, inflation is rarely far behind. So they use these rate hikes to gradually tap the brakes on the economy."

Cramer reminded investors of the Fed's actions leading up to the 2008 financial crisis, when the banking body raised interest rates 17 times in a row to 5.25 percent. The uptrend ended up being a direct cause of the recession.

The situation today is far from what it was back then, Cramer said, giving four reasons for why:

  1. At 2.25 percent, the Federal Funds Rate is "less than half of what it was before the financial crisis," he said.
  2. Today's economy is a lot healthier than it was back then, he argued.
  3. Longer-term rates, which the Fed doesn't control and are used to determine mortgage rates, actually went lower.
  4. Fed Chair Powell said himself that inflation was still under control.

"If that's the case, why does the Fed need to move at all? Because rates have been extremely low ever since the Great Recession," Cramer said. "There's the rub: this is an inherently fraught process we're going through right now. If Powell's too hawkish, he could cause a recession. If he's too accommodating, inflation picks up and erodes the purchasing power of the dollar. That's the glass-half-empty perspective, the bearish view that ultimately triggered today's market-ending sell-off."

WATCH: Cramer reacts to Trump press conference, Fed hike

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

Cramer's New Book