Cramer says a much-needed Fed pause could ignite a stock market rally like we haven't seen in decades

Published Tue, Mar 28 20231:02 PM EDTUpdated Tue, Mar 28 20231:19 PM EDT

Do you know that until three weeks ago the U.S. economy was still doing pretty well despite still-sticky inflation and the fastest set Federal Reserve interest rate increases we've ever seen? In its year-long battle against elevated inflation — from consumer prices to input costs to wages — the Fed hiked nine times since starting last March from near zero to the current 4.75% to 5% range on the fed funds overnight bank-to-bank lending rate. We told ourselves there wouldn't be much of a problem in the economy because the Fed started raising rates from such a low base, and we didn't think there was much slack in the system. Other than in Silicon Valley, we could not discern anything going really wrong. In fact, Fed Chairman Jerome Powell had been about to hit us with a 50-basis-point rate hike at the March meeting, indicating if more were needed he might even do it in lockstep — if not for the possibility of something unseen happening underneath, some rot in the system. Well, it turned out there was rot alright. Powell and company ended up raising rates just 25 basis points after last week's meeting. That rot surfaced when a couple of banks that lent against stocks that weren't public and cryptocurrency — Silicon Valley Bank and Signature Bank, respectively — collapsed nearly overnight. We had bank runs that happened so quickly that they couldn't be stopped. The withdrawals happened over mobile and other devices — couldn't even see them. The culprit? Fed rate hikes: They were so quick that they left any bank that bought too many longer-duration bonds, in an attempt to pick up a little more yield, heavily underwater. The bank examiners were blindsided and we find ourselves where we are with no real safety net for any accounts that are greater than the Federal Deposit Insurance Corporation (FDIC) threshold of $250,000. This new banking crisis injected a level of uncertainty we didn't have before. Notice, I chose my words carefully because none of these banks is all that big. The biggest ones are in pretty terrific shape, even if you decide to question their commercial real estate which has been well-established as the next ticking time bomb because of the work-from-home phenomenon. With the exception of the financial crisis that precipitated the 2007 to 2009 Great Recession, our history is riddled with moments like these where we thought things were going so well that the Fed was hiking only to discover that there were outfits that were struggling. We just didn't know it. Most of us remember the Great Recession as the best example of this situation where everybody in power either seemed oblivious or were believers in some sort of Lord John Russel l laissez-faire system that almost brought the house down. Me? Until then, I used to look forward to just these moments because they caused the Fed to pause and look at the damage it had already caused without realizing it. That's where we are right now. However, the Fed is not tone-deaf. This is not a "they know nothing event" (like the one I pointed out back in August of 2007). The Powell Fed sees the current problems. But current Treasury Secretary Janet Yellen, the predecessor of Powell at the helm of the Fed, seems unwilling to recognize the gravity of the banking woes. She's apparently more concerned about moral hazard than about anything else. In some ways, I can't blame her in that the billionaire clientele of Silicon Valley Bank and the multimillionaire depositors at First Republic Bank (FRC) are hardly sympathetic plaintiffs. The fact is, though, we need a strong banking system and without one, you can forget about getting credit without paying too high a price for it. I can recall a half dozen moments like this one in my career where I really felt that the world was coming to an end and instead what we got were Fed rate cuts, including the second week of October of 1998, well-chronicled in my book "Confessions of a Street Addict," where I thought the Fed didn't understand the gravity of the collapse of one large hedge fund, Long-Term Capital Management. I was wrong. When the Fed took action, we had a three-month rally in the stock market to end all rallies, right into 1999, one that ultimately took us another 15 months before the dot-com crash crushed us. Can it be like that this time? I think it is actually likely, which is why we have put so much money to work here, why we have decided that we want to profit off of the Fed's hands being tied behind their backs by the banking crisis because they don't want a fourth financial institution to bust, joining SVB, Signature and Silvergate Capital. They don't want tiny regional bank dominos falling one by one until all that was left was JPMorgan (JPM) and friends — an unpalatable outcome for the Left and the Right in Washington. At the same time, while don't want special, pleading venture capitalists and vintners making out as if nothing happened, the Fed has to calm down, take a breath, and let stocks go higher. Central bankers should pause even at the risk of higher prices from China's economy coming back after Covid, a trillion dollars in U.S. government-mandated infrastructure spending, and inflation embedded in houses, cars and food. Remember, the Fed could always restart hikes if the banking crisis turns out to be less of a drag on the economy and inflation kicks back into overdrive. (See here for a full list of the stocks in Jim Cramer's Charitable Trust is long.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Federal Reserve Board Chairman Jerome Powell appears on a screen on the trading floor of the New York Stock Exchange (NYSE) during a news conference following a Fed rate announcement, in New York City, February 1, 2023.

Andrew Kelly | Reuters

Do you know that until three weeks ago the U.S. economy was still doing pretty well despite still-sticky inflation and the fastest set Federal Reserve interest rate increases we've ever seen?