Every week there is discussion about the Fed, and when they will interest rates or if they ever will raise rates. Here’s what I think.

Rates will eventually rise. Rates will eventually “normalized” levels. Wow, groundbreaking stuff Sherlock Holmes. More important than when it happens is what that means for investors.

Currently the interest rate yield curve is very flat, meaning that the difference or “spread” between short-term and long-term rates is small. When yield curves are flat, there is low incentive for banks to lend. Banks or we will just say lenders, make money by the difference (spread) between long-term and short-term rates.

As rates rise and the yield curve steepens, lending should increase which is good for the economy. Available capital should increase, which is good for the economy.

As the yield curve steepens financials will likely be attractive because banks as low interest short-term borrowers and high interest long-term lenders with be making more from the increased spread.

What about the overall market, isn’t the stock market only doing good because there is no alternative for investors? Won’t investors leave stocks when yields on bonds become more attractive? It is certainly possible, and I definitely expect a lot of volatility when the rate hikes do begin.

I think that overall investors will realize that stocks provide a higher probability of growth than bonds and will act accordingly. I do not believe a high percentage of investors look at stocks vs. bonds and think to themselves “I like stocks when rates are X, but when rates move to Y I am getting out completely out and moving to bonds.”