The Bank of England has warned that the loss of confidence in the U.S. Federal Reserve's independence or a reversal in AI-driven market optimism could trigger a global selloff.
The Risk Of Sharp Market Correction ‘Has Increased’
In its Financial Policy Committee Record published Oct. 8, the BoE said, “The risk of a sharp market correction has increased,” citing geopolitical tensions and sovereign debt pressures, alongside asset valuations, “particularly for technology companies focused on artificial intelligence,” which it notes have become stretched.
The committee has warned in its report that any bottlenecks in AI progress, or any developments that could alter the expected capex in AI infrastructure, could impact equity valuations.
‘Federal Reserve Independence’ Essential To Maintain Financial Order
While referencing recent developments about the Federal Reserve, the committee noted that “there had been continued commentary about Federal Reserve independence.” It emphasized that this institutional independence is essential to keeping borrowing costs low and maintaining financial order.
The report cautioned that any disruption to that credibility could have wide-ranging and far-reaching effects on the global economy.
A “sudden or significant change in perceptions of Federal Reserve credibility,” the Bank said, could lead to “a sharp re-pricing of US dollar assets, including in US sovereign debt markets,” which it says could lead to “increased volatility, risk premia, and global spillovers.”
Trump Could Get Rare FOMC Majority
President Donald Trump’s recent firing of Federal Reserve Governor Lisa Cook could hand him a rare majority in the Federal Open Market Committee, which is responsible for making rate cut decisions.
According to Macro Strategist Craig Shapiro, if Cook’s seat opens up, Trump could fill two more governor positions, giving him a 4-3 majority on the board, which would extend to 5-2 when Fed Chair Jerome Powell, term ends the following year in May 2026.
Shapiro said that this majority can be used to “stop regional Fed presidents from being reappointed,” or “open up the process for the next Fed chair to replace existing Fed Regional presidents in the second half of 2026.”
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