Fed’s Bowman Warns of Stock Correction If AI Bets Don’t Pan Out

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Federal Reserve Governor Michelle Bowman said she sees a number of risks to economic activity from financial markets, including a sharp downturn in stock prices if returns on…

Federal Reserve Governor Michelle Bowman said she sees a number of risks to economic activity from financial markets, including a sharp downturn in stock prices if returns on investments in artificial intelligence fall short of expectations.

Speaking in Washington on Tuesday, Bowman flagged the risk of “a large correction in equity valuations” stemming from AI returns, along with “a sharp increase in private longer-term rates.”

“Lower equity prices could undermine the resilience in consumer spending,” she said. “And higher interest rates could further strain interest-rate-sensitive sectors of the economy, like housing and small business investment.”

Bowman also signaled she could support an interest-rate hike at the central bank’s final meeting of the year next month, amid persistently elevated inflation.

“Today I am seeing signs that inflation pressures are persisting, while labor market conditions appear to be firming,” she said. “This indicates that there is still work to do to bring inflation closer to 2%.”

Fed officials left interest rates unchanged at their Oct. 27-28 meeting after raising them by a quarter percentage point in September. That was the first rate hike since 2023 as policymakers seek to cool inflation that has been above their 2% target for more than five years.

Bowman said she backed last month’s decision to hold rates steady in order to give the central bank time to better understand how conditions would evolve and how September’s hike would influence the underlying trends in the economy. But recent inflation data have been hotter than she envisioned, she said in prepared remarks before the Council on Foreign Relations.

“While I continue to expect that several of the factors currently boosting inflation will abate next year, currently inflation has proven to be more persistent than I had anticipated,” she said.

A majority of officials in September signaled at least one more rate increase would be necessary this year, according to their median…

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