Global financial stability is facing a two-pronged threat, according to the Bank of England’s Financial Policy Committee (FPC). The first is a rapidly inflating bubble in the artificial intelligence sector, and the second is political pressure on the US Federal Reserve, which could destabilize the US dollar. The committee warned that the risk of a “sharp market correction” has significantly increased due to these converging pressures.
The AI boom has been characterized by “stretched” equity market valuations, particularly for tech companies. Investors, driven by hype about AI’s potential, have pushed company values to astronomical levels. OpenAI is now valued at $500 billion, and Anthropic at $170 billion, figures that the Bank suggests may not be sustainable. The FPC cautioned that markets are “particularly exposed should expectations around the impact of AI become less optimistic.”
This lack of optimism may be well-founded. A recent MIT study revealed that the vast majority of companies—95%—are failing to generate any return from their generative AI investments. This disconnect between hype and reality could trigger a crisis of confidence. The Bank also noted that bottlenecks in power, data, or commodity supply chains could further hamper AI progress and harm the high valuations that are currently priced in by the market.
Simultaneously, the FPC highlighted growing concerns over political rhetoric targeting the US Federal Reserve. Donald Trump’s continued attacks on the central bank’s independence are seen as a material risk. The committee warned that if global investors begin to doubt the Fed’s credibility, it could lead to a massive sell-off of US dollar assets.
The combination of these risks poses a serious threat to the United Kingdom. A sudden market correction in the US tech sector or a repricing of dollar assets would inevitably spill over into the UK financial system. The FPC concluded that such global shocks could result in finance drying up for British households and businesses, underscoring the interconnected nature of the modern global economy.