Fed survey: 87% name AI the top threat to the financial system

AI now sits alone at the top of the financial system's danger list. In the Fed's twice-yearly survey, released Friday, 87% of respondents flagged artificial intelligence as a salient risk, up from 50% in the spring edition. The next-closest concern, a correction in risk assets, drew 52%.

Respondents broke their AI anxiety into three buckets: stretched equity valuations that could crumble if earnings disappoint; cybersecurity danger from sophisticated state actors or from frontier AI models themselves; and the tangled financing structures being built around AI. The survey covers the period through Oct. 28, landing just days before the midterm elections.

The rest of the risk board: higher long-term rates at 48%, cyberattacks at 43% and fiscal debt sustainability at 43%, the last one set against U.S. debt above $40 trillion and a budget deficit near $2 trillion. The Fed drew its answers from market participants, economists, analysts and institutional sources.

The findings land while Wall Street stays jumpy about high-flying AI hyperscalers and towns brace for the data center buildout powering them. Exit polling from this month's midterms found 56% of voters rated data centers as a crucial or major factor in their choices.

Outside the AI alarm, the Fed described the system as fairly stable. One exception: hedge fund leverage is at its highest level since 2013, and it's clustered in a relatively small group.