The Federal Reserve singled out artificial intelligence in its latest financial stability report, warning that it poses a potential threat to asset valuations and financial stability.
The Fed released its semiannual financial stability report on Friday, noting that equity valuations remain persistently elevated, driven in part by market enthusiasm for "superintelligence."
Federal Reserve Vice Chair for Supervision Michelle Bowman also issued a warning earlier this week that stocks could face a sharp decline if returns on AI investment fall short of expectations.
The report also compiled survey feedback from policymakers, community groups and market participants.
Respondents ranked cyberattack risks spawned by advances in AI technology as an increasingly prominent threat, while also expressing near-term concerns about a pullback in risk assets, rising long-end interest rates and the sustainability of US fiscal debt.
The Nasdaq 100 ETF fell 0.7% in after-hours US trading, while State Street's SPDR S&P 500 ETF dropped 0.4%.
Elevated valuations, AI enthusiasm faces a reality check
The Fed noted in the report that asset valuation pressures remain persistently high, with equity valuation metrics staying at elevated levels, partly due to market enthusiasm for "superintelligence" — President Trump's customary term for artificial intelligence.
However, the report also noted that this enthusiasm has cooled somewhat amid market concerns over tech companies' capital expenditure plans and the scale of debt issuance. This wording reveals the inherent tension in the current market: the AI narrative is driving valuations higher, while implementation costs and financing pressures are forming a countervailing constraint.
The Fed emphasized that the report is not a forecast of market movements, but a systematic assessment of potential vulnerabilities.
Top regulator warns: disappointing AI returns will hit stocks
Ahead of the report's release, Federal Reserve Vice Chair for Supervision Michelle Bowman had already issued a clear warning this week about financial market risks.
She specifically pointed out that if the actual returns on AI-related investment fall below expectations, stock prices could face a sharp decline, which would in turn negatively affect overall economic activity.
The financing structure of the AI industry had previously drawn regulatory attention. Circular transaction arrangements between technology manufacturers and startups are seen as a potential source of financial fragility and have come under outside scrutiny.
Rising cyberattack risks, AI a double-edged sword
Surveyed policymakers and market participants also listed cyberattacks as an increasingly important source of risk facing financial markets.
They noted that advances in AI technology are lowering the barriers to carrying out complex cyberattacks, enabling both state and non-state actors to launch more destructive attacks at lower cost; in addition, the potential damage that AI models themselves could cause was also included in the risk assessment.
Beyond cybersecurity, survey respondents also identified three near-term potential vulnerabilities: a pullback in risk asset prices, rising long-term interest rates, and the sustainability of fiscal debt. These three risks are intertwined, together forming a composite pressure facing the current financial system.
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