In this episode, we dive into the stark warnings issued by the Bank of England's financial policy committee (FPC) concerning rising global market risks. The Bank has explicitly cautioned about the growing risk that the artificial intelligence (AI) bubble could burst.

According to the FPC, the risk of a sharp market correction has increased. We explore why equity market valuations currently appear stretched, especially for technology companies focused on AI. Recent months have seen dramatic rises in valuations fueled by hype and optimism, with companies like OpenAI growing significantly, and Anthropic nearly trebling its value.

We discuss the factors undermining investor faith in the boom, including research showing that 95% of organizations are getting zero return from their investments in generative AI. The FPC warns that if expectations around AI progress become less optimistic, or if material bottlenecks related to power, data, or commodity supply chains emerge, valuations could be severely harmed. A sudden market correction, should these risks crystallize, could result in essential finance drying up for both households and businesses. Furthermore, due to its status as an open economy with a global financial center, the UK faces a material risk of spillovers from such global shocks.

Finally, we look at non-AI related stability risks. Policymakers are concerned about threats to the independence and credibility of the US Federal Reserve. The FPC suggests that a sudden change in the perception of the Federal Reserve’s credibility could lead to a sharp repricing of US dollar assets, potentially causing increased volatility and global spillovers. Tune in to understand why the Bank of England believes "uncertainty is the new normal" in the global economy.