Bloomberg Television7 min
An AI Bust May Not Cause a Financial Crisis, Dudley Says
Interview
- The AI sector risks a "boom to bust" cycle driven by winner-take-all dynamics and a potential financial crisis similar to past eras, though current market discourse is more aware of risks than during the pre-Great Financial Crisis period.
- High AI demand is exerting upward pressure on interest rates by consuming significant credit, while a potential bust in the boom would exert downward pressure on rates and negatively impact economic growth.
- Future investment spending in data centers is projected to increase in 2027 compared to 2026, with speculation regarding election-induced construction slowdowns considered probable in the medium to long term but with uncertain timing.
- Non-bank financial activities, specifically off-balance sheet borrowing for AI financing, require greater transparency and a potential explicit financial stability mandate granted to the Federal Reserve or the Financial Stability Oversight Council.
- The Federal Reserve likely lacks complete information on counterparty risks within the non-bank sector and remains less inclined to adjust monetary policy for minor equity market fluctuations unless declines are substantial relative to recent gains.
- A complete evaporation of AI financing resulting in next-year investment spending weaker than current levels would cause significant negative effects on both economic activity and the stock market.
- Lower oil prices are expected to positively boost growth by increasing real income, while the Federal Reserve cannot predict economic impacts from the uncertain outcome of the Iran conflict.