SynopsisKansas City Federal Reserve President Jeff Schmid has expressed concerns about the interconnectedness of the artificial intelligence industry. He emphasized the need for better understanding of the emerging AI ecosystem and its economic significance.

Schmid drew parallels between the AI boom and the financial system before the 2008 crisis. The rapid investment in AI infrastructure raises questions about possible systemic risks.

ReutersFederal Reserve Bank of Kansas President Jeff Schmid wonders whether AI ecosystem is too big to fail. Kansas City Federal Reserve President Jeff Schmid has raised concerns about whether the rapid expansion of the artificial intelligence industry and data-centre investment could eventually create an ecosystem so interconnected and economically significant that it becomes “too big to fail.”

Speaking about the AI boom, Schmid said the Federal Reserve needs to better understand the network of companies, financing arrangements and contracts developing around the technology as investment accelerates." Where we have to start to really synthesize what's happening in the AI and the data center build-out is are we moving to a too-big-to-fail AI ecosystem," he said, according to a Reuters report.

For live updates on US Markets, click hereSchmid’s comments draw a parallel with the financial system before the 2008 crisis, when large banks and financial institutions had become deeply interconnected through lending, securities and complex financial contracts. When losses linked to the US housing and mortgage markets spread through the system, the failure or distress of major institutions threatened broader financial stability.

The crisis intensified in 2008 after the collapse of Lehman Brothers, while the US government and Federal Reserve took extraordinary measures to stabilise financial institutions and credit markets. The episode demonstrated how institutions considered systemically important could create significant risks for the wider economy when their problems spread through interconnected financial networks.

Schmid said the question for policymakers is whether a similar dynamic could emerge around AI, particularly as technology companies, semiconductor firms, cloud providers, data-centre operators, energy companies and financial institutions become increasingly linked through investment and commercial contracts." You worry a little bit about how do we understand what's inside.

Is there anything systemic?" he asked.