‘Risk Premia’ Could Spike on Fed Doubts, Bank of England Cautions

“Risk premia” on US assets could spike if doubts about the Federal Reserve’s credibility take hold, the Bank of England has cautioned. This was a key part of a broader warning from the Financial Policy Committee (FPC) about mounting threats to global financial stability, including a burgeoning AI bubble.
The FPC report highlighted Donald Trump’s “continued commentary about Federal Reserve independence” as a major concern. It warned that if global investors start demanding a higher premium to hold US assets due to political risk, it could trigger a “sharp repricing” and widespread volatility.
This political threat is emerging at a time when markets are already showing signs of speculative excess, particularly in the AI sector. The FPC described the valuations of firms like OpenAI ($500 billion) as “stretched,” making them vulnerable to a sudden correction.
The potential for a correction is supported by data showing a lack of profitability in the sector. An MIT study found 95% of businesses are not yet earning a return from generative AI, a fact that could shatter the market’s optimistic narrative.
The Bank of England concluded that the UK is highly exposed to these converging risks. A spike in US risk premia or a crash in the tech market would create “material spillovers” that could destabilize the British financial system.