Don’t fight the Fed,” the saying goes. When the nation’s central bank is raising short-term interest rates to put the brakes on the economy, it’s a good idea for stock investors to move to the sidelines. However, this is not what’s happening now.

The Fed seems quite far from raising rates, since the economy isn’t showing any signs of overheating. At 7.6 percent, unemployment remains above the Fed’s target and inflation well below.

Given these tepid results, there is fear about the Fed reducing the amount of stimulus it’s providing to the economy, after more than two years. The likelihood is that this September the Fed will cut back its bond purchases from an extraordinary $85 billion each month to perhaps $60 billion, and continue tapering down.

We think this is good news. The winding down of stimulus means the US economy is showing signs it can grow on its own, as US corporations and consumers have taken advantage of extremely low interest rates to get back on their financial feet.

In terms of market outlook, we think what the Fed is not doing – it’s not raising rates – is more important than what it is doing – curtailing stimulus.

In anticipation of a less accommodating Fed, longer-term interest rates have already leaped. They’re up 1 percentage point since May – a 62 percent increase — to 2.7 percent on the 10-year Treasury.

There could be more downside for long-term bonds, given that interest rates are still at historically low levels and have lots of room to rise. Consider that 30-year Treasuries were recently yielding 3.7 percent, about half their 7.2 percent historical average.

Because the economy is strengthening, so there is no reason to think the Fed will veer from its stated course: to end stimulus and eventually raise rates if warranted. A total of 195,000 jobs were added in June, ahead of the 182,000 average during the past 12 months, and hourly wages rose 10 percent. US consumer confidence is at a six-year high.

Going for Growth

A brightening US economy is good news for equities. The yield on the S&P 500 is on par with 10-year Treasuries, and corporate earnings are forecast to rise more than 10 percent this year and again in 2014. It’s true that nominal stock prices are at an all-time high, but that doesn’t mean much, since the S&P 500 is still roughly where it was back in 2000.

Of course, equities face some hurdles — Europe remains mired in recession and China is still slowing down. So as always, diversification will be key. This issue, we look at two types of balanced funds along with a slew of investment ideas for a growing economy.