An AI Bust May Not Cause a Financial Crisis, Dudley Says

Former New York Fed President William Dudley argues that a collapse in artificial intelligence-related valuations would likely be a sharp equity correction rather than a systemic financial crisis, because the sector's debt exposure is comparatively limited. The transmission channel he points to runs through wealth effects and risk appetite rather than bank balance-sheet stress, meaning losses would hit consumer spending and corporate investment plans more than credit intermediaries. Equity indices heavily weighted toward large-cap technology and the semiconductor and data-center supply chain would be most exposed, along with high-multiple growth stocks and private-market valuations that have not yet been marked to market. Traders should watch upcoming hyperscaler capital expenditure guidance and credit spreads on data-center and AI infrastructure debt, since a pullback in spending commitments or widening issuance costs would be the first observable signal that the expected correction is spreading beyond equity prices.

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