The Bank of England has concluded that the combined threat of a bursting artificial intelligence bubble and political pressure on the US Federal Reserve constitutes a “material” risk to the UK’s financial system. The bank’s Financial Policy Committee (FPC) warned that the likelihood of a “sharp market correction” has grown significantly.
The FPC is sounding the alarm over “stretched” equity valuations, particularly for tech companies that have become market darlings due to AI hype. The report noted the massive valuations of firms like OpenAI ($500 billion) and Anthropic ($170 billion) as evidence of a market susceptible to a sudden loss of confidence.
This lack of confidence could be triggered by the growing realization that AI is not yet a profit engine for most businesses. An MIT study found that 95% of organizations are seeing no return on their generative AI spending. The Bank fears that this could lead to a rapid and severe correction in stock prices as investors adjust their expectations.
Compounding this risk is the ongoing political rhetoric in the US threatening the independence of the Federal Reserve. The FPC views Donald Trump’s commentary as a serious destabilizing factor. A loss of credibility for the Fed could have catastrophic effects on global markets.
The committee warned that such an event could lead to a “sharp repricing of US dollar assets,” causing turmoil worldwide. For the UK, the FPC was unequivocal: the “risk of spillovers to the UK financial system from such global shocks is material,” posing a direct threat to the availability of credit and overall economic stability.
AI Bubble and Fed Politics: A ‘Material’ Risk to UK, Central Bank Concludes
