4 smart takes on the Fed's cautious optimism

The Fed will keep propping up the economy, said Binyamin Appelbaum in The New York Times. That was the main message Fed chairwoman Janet Yellen delivered this week when she appeared before the Senate Banking Committee to deliver the central bank's semiannual monetary policy report. While she acknowledged that "important progress has been made in restoring the economy to health and in strengthening the financial system," Yellen clearly remains concerned about unemployment and the strength of the recovery. Last week, the Fed announced plans to end its controversial bond-buying program, known as quantitative easing, by October, but it is still "in no hurry to start increasing short-term interest rates." In some ways, that cautious approach "is actually contributing to the sense of stability," even as it is "likely to reinforce a sense of complacency among investors" who view the Fed as "committed to its policy course."

Yellen is wise to be cautious, said Ylan Mui at The Washington Post. With quantitative easing winding down, the Fed is trying to figure out what to do next. After all, there are high stakes facing the central bank: "Move too fast or too abruptly, and the fragile recovery could falter." But the Fed can't afford to move too slowly, either. "Years of ultra-low interest rates have boosted stock markets to record highs — levels some worry are unsustainable." Even Yellen herself is aware of this, remarking that "valuations appear stretched" in some sectors.

But don't call it a bubble just yet, said Neil Irwin in The New York Times. While Yellen and the Fed "have taken note" of rising asset prices, "she does not buy the theory that there is a bubble forming." She does, however, seem worried about "pockets of froth in markets," particularly when it comes to junk bonds. The Fed is keeping its eye on another sector, too. In its monetary policy report, the central bank said valuations in the social media and biotech industries were "substantially stretched." That could be "the first formal hint that Fed officials see the boom in prices for unproven businesses" in those sectors as a sign of another potential bubble. On the plus side, regulators seem to be monitoring the situation closely, as Yellen "wants to ensure that if there is indeed some bubbling in these particular markets," when that bubble bursts, it won't bring down the entire banking system.

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For now, the Fed is in "watch-and-wait mode," said John Makin at Real Clear Markets. But how long can that last? "Eventually the realization will dawn that the only way to get the economy moving again is to work on the supply side." That means increasing capital spending and boosting employment. But those kinds of measures lie "outside the purview of the Fed's traditional responsibilities." That said, a cue from Yellen could "actually prompt the White House and Congress to end their stalemate and begin to undertake steps to help the economy grow."