The Bank of England (BoE) has warned that global financial markets could face a sharp correction if investor confidence in artificial intelligence (AI) prospects or the independence of the U.S. Federal Reserve weakens.
In its latest Financial Policy Committee (FPC) report, the BoE noted that U.S. stock valuations are nearing levels last seen during the dot-com bubble, while U.S. government bonds remain highly vulnerable to any doubts over the Fed’s credibility.
“The risk of a sharp market correction has increased,” the committee said, describing potential spillovers to the UK’s financial system as “material”.
The warning comes amid growing concerns about political pressure on the U.S. central bank. BoE Governor Andrew Bailey recently told the UK Parliament that he was uneasy about challenges to Fed independence, particularly following reports that President Donald Trump had urged the Fed to slash interest rates and attempted to remove one of its policymakers.
According to the BoE, a sudden loss of confidence in the Fed could trigger a sharp repricing of U.S. dollar assets, higher volatility, and global financial spillovers. Such a scenario could also push up the cost of UK government borrowing, which is closely linked to U.S. Treasury yields.
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The central bank also raised red flags about market overreliance on AI-driven stocks. It said that 30% of the S&P 500’s value now comes from just five companies, the highest concentration in half a century.
“Valuations based on past earnings are the most stretched since the dot-com bubble,” the BoE said, warning that markets could face steep losses if investor optimism about AI’s impact weakens.
The BoE noted that rising public debt, coupled with political instability in France and Japan, continues to amplify risks in advanced economies. British gilt yields recently hit their highest levels since 1998, increasing the cost of government borrowing.
Domestically, however, the central bank said UK financial stability risks remain contained. Households and businesses are adapting to high inflation—estimated at 4% in September—and tighter credit conditions.
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BoE risk managers cited cybersecurity and geopolitical tensions as the top threats to Britain’s financial stability.
The bank left its main regulatory tools unchanged, maintaining the countercyclical capital buffer (CCyB) at 2% and the minimum leverage ratio at 3.25%.
Esther Ososanya is an investigative journalist with Pinnacle Daily, reporting across health, business, environment, metro, Fct and crime. Known for her bold, empathetic storytelling, she uncovers hidden truths, challenges broken systems, and gives voice to overlooked Nigerians. Her work drives national conversations and demands accountability one powerful story at a time.
