For Federal Reserve Chair Janet Yellen, it's steady as she goes.
In the first of two days of testimony before Congress on monetary policy, Yellen dismissed first-quarter weakness in the economy as a temporary slide caused by harsh weather. She noted the recent increase in inflationary pressure, but noted that it remains below the Fed's targets and is likely to moderate in coming months. She dismissed concerned over a possible market bubble, relying on the familiar defense that valuations are within historical ranges. And while celebrating recent improvements in the job market, she justified the continuation of accommodative policy by pointing to issues like low labor market participation and a lack of wage gains.
Despite the Fed's commitment to continue stimulus, it plans end its bond purchase program in October. The central bank turned to such "quantitative easing," as the policy is called, in the early days of the financial crisis in a move to shore up economic growth.
Now the question is when the Fed will move to hike short-term interest rates, which have been near zero percent since 2008. And on that point, there was a surprise towards the end of Yellen's question and answer session.
Congressional officials had been pressing Yellen on the risks of bubbles in the financial markets, drawing out a warning from her on stock valuations in specific areas including small caps, biotechnology and technology momentum favorites like Pandora (P) and Facebook (FB).
Her belief, as echoed by the heads of other major central banks including Mario Draghi at the European Central Bank, is that even if bubbles existed, the best way to combat them would be via regulatory oversight -- not by jacking up interest rates and potentially destabilizing the economy.
Pressed further on the need to maintain zero percent interest rates in this situation -- a level of cheap money that may encourage the formation of price bubbles -- Yellen responded that the job market remains deeply troubled. In other words, when given the choice between risking an asset price bubble and keeping the momentum in the job market, she is leaning toward jobs.
History and the economic data will ultimately prove whether or not this is the right strategy. After all, the reason the recent financial crisis and recession was so deep, and resulted in so many job cuts, was because the housing bubble was allowed to become so large that it threatened the entire financial system when it blew.
One could make a case that right now, after six years of essentially free money, we could be in the midst of an even larger bubble. A bubble that the Fed is loath to prick for fear of the consequences to the economy and the job market when it collapses.
That means that the Fed, by all indications, will continue to justify a low interest rate policy for as long as possible, even in the context of higher inflation, to avoid the consequences of another blown bubble.
That should continue to bolster the precious metals, which have come under some selling pressure this week after posting the strongest performance since last summer. Investors have been moving into gold, silver, and the related mining stocks as they seek inflation protection in their portfolios to offset the Fed's reluctance to normalize its policy stance.
Disclosure: Anthony has recommended SLV to his clients.