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Fed needs to take 'wait-and-see' approach to rate hikes for stocks to get a 'sustained' rally: Cramer

Key Points
  • CNBC's Jim Cramer goes over the possibilities for Wednesday's pivotal announcement from the Federal Reserve.
  • The "Mad Money" host lays out the best possible outcome for the stock market.
  • Fed officials must "repudiate" the idea that the U.S. economy needs a series of rate hikes, he says.
Fed needs to take 'wait-and-see' approach to rate hikes for stocks to get a 'sustained' rally: Cramer

The stock market's early-day rally on Tuesday was a "dress rehearsal" for what could happen if the Federal Reserve says Wednesday that it will take a "wait-and-see" approach on its interest rate policy, CNBC's Jim Cramer said as stocks reversed into the close.

On Wednesday, the Fed is expected to announce another interest rate hike in an effort to combat what it sees as rising inflation. Cramer, host of "Mad Money," has argued in recent months that while the U.S. economy can likely handle one more hike, the Fed's previous projection of three more hikes in 2019 could dramatically slow business.

And while stocks rallied Tuesday morning for the reasons Cramer said could turn the market around, the Fed's upcoming meeting, "above all," will determine whether the market can mount a "sustained advance," he said.

"Today was a dress rehearsal for the kind of rally we can get if the Fed does the right thing tomorrow and repudiates the idea that we need a series of rate hikes in 2019, not just one more tomorrow," Cramer said Tuesday. "If we get the Fed on board, expect more positive action like we had this morning before the market gave up much of its gains."

Here are the possible outcomes he sees from the Federal Open Market Committee's pivotal two-day confab:

First, the Fed could very well stand by its previously stated agenda of three more hikes in 2019 due to strong employment trends.

"That would be completely disastrous," Cramer said. "Call it the 'Grizzly Man' scenario because it ends with us getting devoured by the bears."

Second, the Fed could put through the widely expected December rate hike, but say it will wait and see about the rest, citing "the collapse in oil prices," the "Mad Money" host said.

"This is the rational approach, and if the Fed takes it, we could neutralize the bears among us," he said.

Third, the Fed could announce that it will not tighten rates again because of the already slowing economy. Cramer said this possibility was unlikely because, as an independent institution, the Fed would be hesitant to cave to President Donald Trump's requests for this exact move.

"Bizarrely enough, this is a tough outcome to parse. While no rate hike would be the best result for the economy, and a lot of investors would be appeased, I think there'd be a cohort of money managers who panic because they take their cue from the Fed, and no rate hike means things are much worse than many of these guys seem to believe," he said.

"Remember, if we're going to get a sustained bounce, we need one thing above all others: after the rate hike everyone's expecting tomorrow, the Fed needs to make it clear that they'll wait and see rather than continuing to tighten," Cramer continued. "Without it, it's very hard to get a sustained advance."

WATCH: Cramer talks Tuesday's whipsaw trading session and upcoming Fed meeting

Fed needs to take 'wait-and-see' approach to rate hikes for stocks to get a 'sustained' rally: Cramer

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