The Bank of England’s Financial Policy Committee has flagged twin dangers to the global economy: a speculative bubble in the artificial intelligence sector and political threats to the credibility of the US Federal Reserve. In its latest assessment, the committee warned that the “risk of a sharp market correction has increased” as these two major risks loom over financial markets.
The report highlights “stretched” equity valuations, especially for tech companies riding the AI wave. Firms like OpenAI and Anthropic have reached valuations of $500 billion and $170 billion, respectively, fueled by what the Bank suggests is excessive optimism. This has created a fragile market environment where a shift in sentiment could lead to a sudden and severe downturn.
The basis for this optimism is being challenged by data on the ground. An MIT study recently revealed that 95% of businesses investing in generative AI are not yet seeing any financial return. This gap between hype and reality is a major concern for the FPC, which warned of a potential “re-evaluation of currently high expected future earnings” that could pop the bubble.
Simultaneously, the committee expressed unease over “continued commentary about Federal Reserve independence” in the United States, alluding to Donald Trump’s political pressure on the central bank. The Fed’s perceived impartiality is crucial for maintaining global confidence in the US dollar and the stability of the entire financial system.
A significant blow to the Fed’s credibility could provoke a “sharp repricing of US dollar assets,” unleashing volatility across global markets. The FPC concluded that the UK is highly exposed to these risks. The “spillovers” from such global shocks would be “material,” with the potential to freeze credit markets and inflict serious damage on the UK economy.
