Furious pace of AI investment on some Fed officials' radar now

WASHINGTON (Web Desk) - Federal Reserve officials are increasingly assessing whether the rapid surge in artificial intelligence (AI) investment could create risks for the US financial system, although they do not currently believe the sector poses the kind of threat seen during the housing or dot-com bubbles.

New York Federal Reserve President John Williams said the current wave of AI investment reflects strong enthusiasm for a transformative technology rather than a speculative bubble.

Speaking to Reuters, Williams said investors are trying to determine the long-term economic value of AI, a process that is likely to generate significant market volatility as expectations evolve.

He noted that while borrowing to finance AI projects has increased, much of the debt is being taken on by highly profitable companies, reducing immediate concerns over financial stability.

However, some Federal Reserve officials have expressed greater caution. Kansas City Fed President Jeff Schmid warned that the industry's growing reliance on complex financing structures and expanding interconnections could eventually create systemic risks if left unchecked.

Schmid questioned whether the AI sector could become "too big to fail," arguing that policymakers should begin examining the industry's broader impact on the financial system.

Meanwhile, Apollo Chief Economist Torsten Slok said data centre investment remains less than half the size of the US housing boom at its peak in 2005, although AI-related spending is expanding at a faster pace relative to economic output than housing investment did before the global financial crisis.

Federal Reserve officials said the AI sector will remain under close observation as investment accelerates and questions persist over the technology's long-term financial returns.