Jim Cramer's guide to investing: What does the Federal Reserve do?
It's important for investors to understand how the Federal Reserve operates and why it can drive market action, CNBC's Jim Cramer said.
"We fear the Fed because the Fed sets interest rates, and if they get it wrong, they can allow inflation to run unchecked or do some real damage to the economy and to you," he said. "We adore the Fed because when they get it right, the results can be very, very good for the stock market."
The Fed is the U.S.'s central bank, tasked with regulating monetary policy and setting the federal funds rate, which is the short-term interest rate banks can use to borrow from each other overnight. The Fed is charged with keeping inflation in check without sending the economy into a recession, encouraging employment while keeping prices stable. It is considered an independent agency, as board members are appointed to serve terms, not elected. This independence relieves reelection pressure that might discourage Fed members from being "ruthless enough" if it's necessary to make unpopular policy decisions that bring the market down, Cramer said.
When the economy seems to be slowing down, the Fed cuts interest rates to stimulate business action. Rate cuts, he said, make it easier to own stocks and can send the market soaring. But when inflation heats up, the Fed raises rates, sometimes aggressively. While rate hikes hinder inflation, they also hurt the economy. Banks pass on increased borrowing fees to customers, which makes businesses more cautious and less apt to expand or hire new employees. Cramer said there have been Fed-induced recessions followed by Fed-induced recoveries.
Even though part of the Fed's job is to promote employment, Cramer said it must sometimes encourage layoffs to quell fiery inflation. Inflation "destroys a lot of wealth, and high prices make life miserable for everyone," Cramer said, adding that it can be "very difficult to stamp out."
Wage inflation is the most dangerous kind of inflation to the Fed, he continued. When businesses feel they must raise wages to keep employees, they raise their prices to compensate, Cramer continued. As workers have more money to spend, demand increases, so prices continue to rise, and "suddenly there's inflation everywhere," Cramer said. He added that higher wages then become meaningless to consumers because everything is so expensive.
"When you see inflation, that should scare you," Cramer said. "Because that means the Fed will raise interest rates to stamp it out. They're going to do their job, even if it means sending the economy into a tailspin."
Click here to download Jim Cramer's Guide to Investing at no cost to help you build long-term wealth and invest smarter.Disclaimer
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
an hour ago
- Yahoo
Taiwan central bank says US debt rising too fast may impact trust in Treasuries
TAIPEI (Reuters) -Taiwan's central bank governor warned on Saturday that rapidly rising U.S. debt could be "unfavourable" to the outlook for U.S. Treasuries and that U.S. President Donald Trump's trade policies have made investors cautious. Taiwan's $593 billion in foreign exchange reserves are more than 80% made up of U.S. Treasury bonds, according to the central bank, which said earlier this month that Treasuries were "sound" and still favoured by investors. It added there were no worries about the dollar's position as the leading international reserve currency. Governor Yang Chin-long, in a speech posted on the central bank's website, said Trump's repeated criticisms of the U.S. Federal Reserve's monetary policy have caused concerns about its independence. "In addition, Trump 2.0's trade policy has made investors hesitant about holding U.S. Treasury bonds; Trump's budget, the 'One Big Beautiful Bill Act,' may cause U.S. debt to expand too quickly, which is unfavourable to the outlook for U.S. sovereign debt," he said. "All of these have had a significant impact on the international monetary system centred on the U.S. dollar and based on U.S. creditworthiness." Trump's sweeping tax-cut and spending bill is the centerpiece of his domestic agenda. The bill would lead to a larger-than-expected $2.8 trillion increase in the federal deficit over the decade, despite a boost to U.S. economic output, the nonpartisan Congressional Budget Office projected on Tuesday. Trump, in his first few weeks in office, also announced sweeping tariffs on a broad swathe of countries and trading partners, including Taiwan, only to pause them for 90 days in April to allow for talks to take place. Yang said Trump had been hoping the tariffs could resolve the U.S. trade deficit. "However, the tariff policy not only fails to solve the structural problems, it will also impact the U.S. economy, and threaten to further affect the outlook for global trade and the economy." Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
2 hours ago
- Yahoo
Powell comments, consumer confidence, PCE: What to Watch
Here's what investors are watching next week, starting Monday, June 23. Nike (NKE) will be releasing its fourth quarter results after the market closes on Thursday. Other earnings reports next week include KB Home (KBH), Carnival (CCL), FedEx (FDX), BlackBerry (BB), General Mills (GIS), Micron (MU), and McCormick (MKC). Federal Reserve Chair Jerome Powell will testify for Congress on Tuesday. More Fed commentary will come throughout the week, including from Cleveland Fed president Beth Hammack. June's consumer confidence data will be released Tuesday morning, shedding light on the state of the consumer. Personal Consumption Expenditures (PCE) data — the Fed's preferred inflation gauge — for the month of May will be out on Friday. To watch more expert insights and analysis on the latest market action, check out more Market Domination Overtime here. Sign in to access your portfolio
Business Insider
2 hours ago
- Business Insider
Stock Market News Review: SPY, QQQ Slip as Recession Signal Flashes, Fed Officials Split on Rate Cuts
Both the S&P 500 (SPX) and Nasdaq 100 (NDX) closed the Friday trading session in the red as geopolitical and economic uncertainty continue to persist. Confident Investing Starts Here: The market received a morning boost after President Trump announced on the Juneteenth holiday that the U.S. would hold off from striking Iran's nuclear facilities for two weeks to allow a window for negotiations. However, those gains were quickly erased after The Conference Board's Leading Economic Index (LEI) flashed a recession signal. The LEI has fallen by 2.7% for the six months ended May, with its annualized six-month growth rate dropping below -4.1%, one of the two requirements that trigger a recession warning. The other requirement occurs when the six-month diffusion index reaches or drops below 50, which signals that most of the components within the LEI are falling. The components include manufacturing, labor market, sentiment, and credit statistics, among others. The recession indicator isn't perfect, although it did precede the recessions of 2000 and 2008 while issuing false signals in 2022, 2023, and 2024. Meanwhile, chip and AI stocks took a hit after a Wall Street Journal report that the U.S. Department of Commerce (DOC) is planning on restricting Samsung, SK Hynix, and Taiwan Semiconductor's (TSM) access to American chip-making technology in their Chinese factories. The three companies currently enjoy a blanket waiver on moving U.S. chip-making equipment to their Chinese facilities, although DOC export controls head Jeffrey Kessler has informed them that the waivers could be cancelled. The policy hasn't been set in stone yet, however. In interest rate news, Fed officials are split on when to cut rates sooner or later. Fed Governor Christopher Waller supports a rate drop as soon as July while Richmond Fed President Thomas Barkin doesn't see a rush for lower rates while the labor market and consumer spending remain healthy. 'I don't think the data gives us any rush to cut… I am very conscious that we've not been at our inflation target for four years,' said Barkin in an interview with Reuters.
