By Michael S. Derby
Aug 6 (Reuters) – Federal Reserve officials are beginning to mull whether the frenzied investment driving the buildout of the artificial intelligence sector is getting out of hand and creating risks for the financial sector.
For now, some of the officials who have tackled the subject call for vigilance, dashed with a sense that a financial crisis mirroring what happened 20 years ago with housing, and to a lesser degree, the dot-com shakeout before that, is probably not in the offing. Still, the scale of investment, the uncertain returns for an unproven technology, the rise of tricky financing structures and increased use of debt have moved AI finance onto central bankers’ radar.
“I don’t see this as a bubble kind of situation,” Federal Reserve Bank of New York President John Williams said in an interview with Reuters conducted on Friday.
“What we’re seeing is a very high level of excitement, enthusiasm around new technology, around AI,” Williams said. “Investors are trying in real time to solve an almost intractable problem, and that is how big are the benefits of AI going to prove to be,” and trying to answer these questions will lead to volatility.
Williams said that while there’s been an increase in borrowing to support the AI investment it is being managed by companies with high earnings, noting, “I’m not as worried about the financial stability from the leverage right now.”
Torsten Slok, chief economist at money manager Apollo, said in a research note, “The data-center buildout is still less than half the size of the housing boom, which peaked at 6.6% of GDP in 2005,” while at the same time the investment pace relative to GDP has been growing faster than housing did in the run up to the global financial crisis.
MONITORING TIME
Others on the Fed appear less sanguine about AI risk relative to Williams.
Given how the industry is financing itself “I would argue that, that there’s some signs that we have to really start to talk about that on a macro level, is this industry becoming another too big to fail?” asked Kansas City Fed President Jeff Schmid in a speech on Tuesday.
In particular, he’s worried about the flow of financing and how the linkages could be a vector where a problem starts at one stage and then propagates.
Schmid asked, “Does the does the circular motion of a commitment, let’s say a contractual commitment to a data center to an energy provider … to a community that it serves, is that, is that circle getting too leveraged? And if you get a spark that starts a flame, what happens?”