AI Investment Sparks Concerns Among Fed Officials Over Financial Sector Risks
The rapid growth of artificial intelligence investment has raised concerns among some Federal Reserve officials. According to them, this frenzied investment is creating risks for the financial sector, potentially leading to a crisis similar to the housing bubble or dot-com shakeout. While they don't see it as an imminent threat, they urge vigilance and monitoring.
Federal Reserve Bank of New York President John Williams said that while there's been a high level of excitement around AI, investors are trying to solve an intractable problem, determining the benefits of AI, which will lead to volatility. He emphasized that borrowing to support AI investment is being managed by companies with high earnings and therefore, he's not worried about financial stability from leverage right now.
However, others on the Fed, such as Kansas City Fed President Jeff Schmid, are more concerned about the flow of financing and potential linkages between companies. He asked whether the circular motion of commitments to data centers is getting too leveraged and if so, what would happen if a problem starts at one stage and propagates.
The Federal Reserve officials are trying to put together a dashboard to identify potential risks, not based on past financial crises but on what could go wrong. This includes the increased rise of borrowing to fuel growth, which might be an issue according to San Francisco Fed chief Mary Daly.