Of course, one can always try to estimate a fundamental value for stocks and other assets - I will discuss some possible indicators of fundamental value and overvaluation in a moment. But there is the additional difficulty that the prices of equities and other assets are set in competitive financial markets, which for all their undeniable foibles are generally highly sophisticated and efficient.
Thus, to declare that a bubble exists, the Fed must not only be able to accurately estimate the unobservable fundamentals underlying equity valuations, it must have confidence that it can do so better than the  6  A sampling of recent work advocating more-proactive responses to bubbles includes Bordo and Jeanne (2002); Borio and Lowe (2002); Cecchetti, Genberg, Lipsky, and Wadhwani (2000); Cecchetti, Genberg, and Wadhwani (2002; Dupor (2002); and International Monetary Fund (2000).