Abstract:
The Federal Reserve pointed out in its semi-annual financial stability report released on Friday that artificial intelligence and high asset valuations may bring potential vulnerabilities. "Asset valuation pressures remain elevated. Equity valuation measures remain elevated, driven in part by the market's enthusiasm for superintelligence," the Fed said, adopting the term "AI" favored by President Donald Trump. The frenzy has been tempered by concerns about corporate capital spending and debt issuance plans, the bank added.
Michelle Bowman, the Federal Reserve's vice chair for supervision, warned earlier this week that financial markets could pose risks to economic activity, including the possibility of a sharp decline in the stock market if returns on investment in artificial intelligence do not meet expectations. Financing arrangements in the AI industry have previously come under scrutiny as circular deals between tech manufacturers and start-ups have raised concerns.
The Fed's report, which is not a forecast, also cited survey responses from policymakers, community groups and market participants to assess a range of risk events that would be most worrisome if they occurred.
These respondents noted that the risk of cyberattacks targeting financial markets is growing, in part because advances in artificial intelligence have lowered the threshold for state and non-state actors to launch sophisticated attacks, but also because of the damage caused by AI models. They also hint at possible short-term vulnerabilities arising from a pullback in risk assets, rising long-term interest rates and fiscal debt sustainability challenges.
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