Top Federal Reserve official cautions that AI’s short-term potential is exaggerated and highlights widespread risks

A senior official from the US Federal Reserve recently highlighted the potential risks that generative artificial intelligence (GenAI) poses to the financial system. Vice chairman for supervision, Michael Barr, expressed concerns about the attributes of GenAI that could lead to market manipulation and increased volatility.

In a speech at the Council on Foreign Relations in New York, Barr emphasized how the characteristics of GenAI such as speed, automaticity, and ubiquity could create new risks on a large scale. He cautioned that as GenAI agents are programmed to maximize profit, they could engage in coordinated market manipulation, potentially causing asset bubbles and crashes.

Furthermore, Barr raised the issue of the concentration of power in the hands of a few as a result of GenAI, which could exclude many from reaping its benefits. He also warned that non-banks may be driven to take more risks and operate in less-regulated territory due to the allure of advanced technology.

Despite the current hype surrounding GenAI and its potential gains, Barr cautioned that failure to deliver on these promises could lead to a market correction. He noted that while AI has driven a bull run on Wall Street, the long-term implications of AI are often underestimated.

One of the key concerns surrounding AI is its impact on the labor market. Barr referenced an analysis by the International Monetary Fund, which suggests that 40% of global employment is at risk due to AI. When asked about the effects of AI on global employment, Barr acknowledged that history has shown the labor market can adapt to new technology, but described the adjustment as a painful process.

Additionally, Barr defended his decision to step down from his role as vice chairman for supervision after President Donald Trump threatened to dismiss him. Barr maintained that the President lacked the legal authority to fire him but chose to resign to avoid a lengthy legal battle that would hinder the Fed’s work.

In response to concerns that Trump might influence the Federal Reserve, Barr emphasized the institution’s independence from political pressures. Fed chairman Jerome Powell has affirmed that Trump has no authority over monetary policy decisions and cannot dismiss him.

Looking ahead, the article also touches on the potential for AI to impact various industries and sectors, with a particular focus on the financial system. It highlights the need for regulators to closely monitor the effects of AI and ensure that appropriate safeguards are in place to mitigate risks associated with this advanced technology.