Federal Reserve Chair Janet Yellen partly explained the Fed's comments about biotech and social media stocks in her Wednesday morning appearance before the House Financial Services Committee.
"We understand that maintaining interest rates at low levels for a long time can incent reach-for-yield or asset bubbles, so we are monitoring this very closely, and that's in part why I referenced some of these trends in my opening testimony," she said.
"My general assessment at this point is that threats to financial stability are at a moderate level and not a very high level," Yellen continued. "Some of the things that I would look at in assessing threats to financial stability to see if they're broad based: broad measures of asset prices, of equities, of real estate, of debt. Do they seem to be out of line with historical norms? And I think there the answer is no. Some things may be on the high side, and there may be some pockets where we see valuations becoming very stretched, but not generally."
"I don't know what the right level of prices is, but in that sense I'm not seeing alarming warning signals," Yellen added.
On Tuesday Yellen gave a tepid thumbs-up to the economic recovery while expressing disappointment in housing and pledging to remain vigilant over asset bubbles.
While Yellen's remarks to a Senate committee were mostly benign and cautious on the economy, a separate Federal Reserve report indicated concern over asset prices.
"Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year," remarks in the full policy report accompanying her testimony said.
The comments gave the market some pause, sending shares in Yelp, for instance, down more than 4 percent and all of the major indexes into negative territory. Broadly speaking, social media and biotech stocks led decliners on the Nasdaq, which was off more than 1 percent before recovering some of the losses.
More broadly, though, Yellen, while noting dangers of "a reach for yield" among investors that was keeping volatility low, said asset prices "remain generally in line with historical norms."
The Fed chair gave no specific indications as to when the central bank will begin raising interest rates other than probably in 2015, and broke from previous unemployment and inflation targets for when a rate might be considered.
"There's no formula and there's no mechanical answer that I can give you about when the first rate increase will occur," she said during the question-and-answer portion of her testimony before the Senate Banking Committee. "It will depend on the progress of our economy and how we assess it based on a variety of indicators."