Bank of England Raises Red Flag on ‘Stretched’ AI Valuations and Fed Credibility

The Bank of England’s Financial Policy Committee (FPC) has raised a significant red flag over the stability of global financial markets. In a new report, it warns of an increased risk of a “sharp market correction,” identifying two primary drivers: “stretched” valuations for AI technology companies and growing threats to the credibility of the US Federal Reserve.
The committee’s analysis points to a potential bubble in the AI sector, where hype and optimism have pushed company valuations to extraordinary levels. Firms such as OpenAI and Anthropic have seen their worth soar to $500 billion and $170 billion respectively. The FPC cautioned that these valuations are fragile and that equity markets are “particularly exposed should expectations around the impact of AI become less optimistic.”
This caution is reinforced by emerging data that questions the immediate economic benefits of the technology. A recent MIT study, for instance, found that a vast majority (95%) of corporate investments in generative AI have yet to yield any financial return. This disparity between market hype and real-world performance could trigger a painful market correction if investor sentiment shifts.
Parallel to the tech industry’s risks, the FPC expressed concern about the political landscape in the United States. Donald Trump’s continued attacks on the Federal Reserve are seen as a threat to the institution’s independence, which is a cornerstone of global economic stability. A perceived loss of Fed credibility could have dire consequences.
The committee warned of a potential “sharp repricing of US dollar assets,” which would create significant volatility and increase risk premiums worldwide. As the UK operates a major global financial centre, it is highly susceptible to such shocks. The FPC concluded that the “risk of spillovers” could materially harm the UK financial system, constricting the flow of credit to the real economy.