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As investor confidence crumbles, the Fed can act to stave off a recession: Cramer

Key Points
  • "If bond yields keep plummeting, it might not matter. We'll scare ourselves right out of this terrific multi-year expansion, for certain," CNBC's Jim Cramer says.
  • "With [the] $40 trillion bond market behaving like a small-cap stock experiencing a short squeeze, we need to take that possibility seriously. It can't be ignored," the "Mad Money" host says.
  • "Right now we are talking our way to into a recession" but the Fed could "give us as many rate cuts as we need to get right back on track," he says.
Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on "Monetary Policy and the State of the Economy" in Washington, July 10, 2019.
Erin Scott | Reuters

CNBC's Jim Cramer on Thursday said that fear can walk the economy into a recession.

Confidence fuels investors and businesses to put money to work and take risks, but endless talk about a potential recession can "erode that very confidence," the "Mad Money" host said.

"If bond yields keep plummeting, it might not matter. We'll scare ourselves right out of this terrific multi-year expansion, for certain," he said. "But a recession? That's not necessarily on the table, as long as the [Federal Reserve] acts aggressively to ensure a soft landing."

Cramer said he has avoided considering that a recession is looming because economic data in employment growth, consumer spending and demand for money have been strong. However, as the bond market struggles and investor confidence wanes, Wall Street has began to reflect those worries, he said.

U.S. Treasury bond yields have tumbled in recent weeks, leading to a brief inversion in the 2-Year and 10-Year bond yields — a trusted recession signal — and a record low return in the 30-Year Treasury, CNBC reported.

Though the Dow Jones Industrial Average made gains in Thursday's session, the 30-stock index plunged 800 points the day prior as the major averages all tanked more than 3%. The stock market is now reflecting concerns of a potential recession, Cramer said.

"I've been telling you that an outright recession is unlikely, but a slowdown [is a] possibility," he said. "With [the] $40 trillion bond market behaving like a small-cap stock experiencing a short squeeze, we need to take that possibility seriously. It can't be ignored."

Still, the yield curve inversion, which means investors have more more trust in making money on shorter-term bonds over longer-term ones, could be wrong, the host said. But confidence is falling as the public worries about the ongoing U.S.-China trade war and some investors want to see lower interest rates.

Others worry that a Democrat presidential hopeful that's unfriendly to business could win the White House in 2020, Cramer added.

"Right now we are talking our way to into a recession, for certain. Can we talk our way out of one? We can't, but the Federal Reserve can," he said. "Fed Chief Jay Powell could come out today, next week, whenever, and say he hears what the bond market's saying, so he'll give us as many rate cuts as we need to get right back on track."

WATCH: Cramer discusses investor confidence and recession fears

VIDEO4:1204:12
As investor confidence crumbles, the Fed can act to stave off a recession: Cramer

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