The Bank of England has issued a strong warning against underestimating the twin threats of artificial intelligence hype and political pressure on the US Federal Reserve. The Financial Policy Committee (FPC) believes these converging risks have significantly increased the probability of a “sharp market correction.”
The FPC report suggests that investors have not fully accounted for the downside risks in the AI sector. The market’s “stretched” valuations, which have propelled firms like OpenAI to a $500 billion worth, are based on a best-case scenario that ignores potential bottlenecks and the current lack of profitability highlighted by a recent MIT study.
Simultaneously, the committee fears the market is complacent about the risk to the Fed’s independence. Donald Trump’s “continued commentary” is seen as a serious threat that could lead to a “sudden or significant change in perceptions of Federal Reserve credibility.”
Such a change would be catastrophic, likely triggering a “sharp repricing of US dollar assets” and causing a spike in global volatility. The Bank of England is concerned that the market is not prepared for such a shock.
The FPC’s message is that these are not isolated issues but interconnected threats that could create a perfect storm. For the UK, the stakes are high, as the “material” risk of “spillovers” could severely damage its financial system and broader economy.