The remark echoes the most famous shot at the stock market taken by the Fed in December 1996, when Fed Chairman Alan Greenspan used the term "irrational exuberance." He was describing a run up in stocks that ended more than three years later with the bursting of the tech bubble.
"I think when the Fed starts saying certain parts of the market are overvalued, I think you shoot first and ask questions later," said Daniel Greenhaus, global market strategist at BTIG.
Fed Chair Janet Yellen was testifying before the Senate Banking Committee in her semiannual testimony Tuesday morning as the Fed released its latest Monetary Policy Report.
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That comment punctured shares of many high fliers and weighed on the overall market. Biotech stocks slumped, and the iShares Nasdaq Biotech ETF IBB fell nearly 2 percent. Social media stocks like Yelp, Facebook and Pandora all fell.
"It certainly is unusual to have the Fed target specific parts of the market. But in the wake of the 2000 tech bubble and the housing bubble the Fed is increasingly focused on areas of overvaluation that can be targeted without raising rates," Greenhaus said. "They're trying to talk them down."
The Fed has commented on its concerns about an overly bubbly leveraged loan market previously, and individual officials have warned about overheated sectors of the stock market in the past. New York Fed President William Dudley specifically mentioned biotech stocks in comments made in March. Fed Gov. Daniel Tarullo in February said that only some assets, like the stocks of some small tech companies and also farm land, show stretched valuations.
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Yellen, in her testimony, said the overheated parts of the market are contained, and there is only overvaluation in pockets, amid signs of investors reaching for yield. In its report, the Fed also noted the tight spreads in corporate bonds and high yield markets.
The Fed also noted in its report that the implied volatility in the S&P 500 was at levels not seen since the 1990s and 2000s, a sign of "improved market sentiment" and "perhaps influence of reach for yield behavior."
"Low rates do have an incentive to push individuals to look for yield, to reach for yield, and that is both a good thing and a bad thing," Yellen told Congerss. "...Of course, we have to be careful about looking for situations where low rates can be incentive for behavior that can be dangerous to financial stability."