A perfect storm of tech speculation and political instability is brewing, and the Bank of England is sounding the alarm. The bank’s Financial Policy Committee (FPC) has warned of a growing risk of a “sharp market correction,” driven by two key factors: an over-inflated artificial intelligence bubble and Donald Trump’s persistent attacks on the independence of the US Federal Reserve.
On the technology front, the FPC described equity valuations as “stretched,” especially for AI-centric companies. The hype surrounding AI has led to massive increases in company worth, with firms like OpenAI and Anthropic reaching valuations of $500 billion and $170 billion, respectively. The committee fears that these markets are built on precarious optimism and are “particularly exposed” to a downturn if the technology’s promise doesn’t translate into profit.
This concern is amplified by research indicating that the AI boom may be disconnected from reality. An MIT study found that 95% of businesses investing in generative AI have yet to see any return, suggesting the hype is far ahead of the economic impact. The Bank warned that this could lead to a painful “re-evaluation of currently high expected future earnings” if investors lose faith.
Simultaneously, the FPC is monitoring political developments in the US with concern. The report highlighted “continued commentary about Federal Reserve independence” from the Trump administration. The credibility of the US central bank is a lynchpin of global financial stability. The FPC warned that any event that causes a “significant change in perceptions” of that credibility could be catastrophic.
The potential outcome could be a “sharp repricing of US dollar assets,” causing a spike in volatility and risk premiums worldwide. These global shockwaves would inevitably hit the UK. The FPC concluded that such “spillovers” represent a “material” risk to the UK financial system, threatening to tighten credit conditions for the entire economy.