Federal Reserve officials are increasingly scrutinizing the rapid pace of investment in the artificial intelligence sector, with some beginning to consider whether the frenzied activity poses risks to financial stability. While some officials, like New York Fed President John Williams, do not see a bubble forming and believe leverage is being managed by companies with strong earnings, others express more caution.
Kansas City Fed President Jeff Schmid questioned if the AI industry is becoming 'too big to fail' due to its financing structures and the potential for problems to propagate through interconnected commitments. San Francisco Fed Chief Mary Daly acknowledged that the growth rate of investment is 'very worrisome,' though she noted that many commitments are still in the announcement phase, mitigating the risk of 'stranded assets.' However, Daly also pointed to the increased borrowing to fuel growth as a potential issue, emphasizing the Fed's role in developing a 'dashboard' to monitor potential risks.
Economist Torsten Slok of Apollo noted that while the data center buildout is less than half the size of the 2005 housing boom, the investment pace relative to GDP has been growing faster than housing did leading up to the global financial crisis.