Artificial intelligence is this year’s investment craze and experts say the profit potential is huge, but this period could be transformed by a messy pop à la the dot-com bust if the Federal Reserve makes one particular mistake, says Bank of America. AI is in a “baby bubble” for now, Michael Hartnett, chief investment strategist at Bank of America Global Research, wrote on Friday. Excitement over AI prospects is palpable in the markets, ignited by the popularity of ChatGPT, OpenAI’s open-language chatbot. Among high-flyers, shares of Meta Platforms and microchip maker Nvidia have more than doubled this year. AI tools bolstering advertising at Facebook’s parent company are catching attention. Billionaire investors are making big AI bets, including Bill Ackman’s push of $1 billion into Google parent Alphabet. Bubbles, whether they’re in the “right things” such as the internet or the “wrong things” like housing, are always started by easy money and are ended by rate hikes, Hartnett said. The Fed may be on the way to pausing its run of rate hikes at its June 14 gathering. This month, it bumped up its benchmark rate for the 10th consecutive time to beat down inflationary pressures. But a pause would be a policy error, and the Fed attempting to fix it by restarting rate hikes could burst the AI bubble, Hartnett said, recalling similar conditions in the dot-com era.

Full critique : BofA says AI is in a ‘baby bubble’ that echoes the dot-com era, and one move could easily blow up the investment frenzy ignited by ChatGPT.