The Yield Curve, the Fed, & P/Es

Interest rate increases by the Fed, when they occur, should preserve stock market P/Es, not impair them…unless these are not successful in controlling inflation or drive us back into deflation. Increases in short-term rates are intended to contain the inflation rate, the driver of P/Es and long-term interest rates. The implication of a 100-basis-point (1%) yield spread is that the interest rate that affects stocks, the long-term rate, is likely to stay relatively low as long as the inflation rate remains low near price stability.