Lisa Cook, a Federal Reserve governor, reassured students of the stability and growth of the U.S. market while cautioning investors on the use of artificial intelligence (AI) in trading algorithms at a Georgetown University event Nov. 20.
Lisa Cook, a current member of the Federal Reserve’s board of governors and the co-chair of the Regional Consultative Group for the Americas, affirmed the strength of the U.S. financial system, analyzed the growing private credit industry and qualified the use of AI in the financial sector. The event, hosted by Georgetown’s Psaros Center for Financial Markets and Policy, aimed to educate business students on the several approaches the Federal Reserve takes in ensuring financial stability.
Earlier this year, the U.S. Supreme Court announced it would begin hearing arguments in January 2026 for Cook’s firing, though it has permitted her to remain at the Federal Reserve until then. The announcement came after President Donald Trump publicly called for Cook’s firing in August, claiming she made false statements on applications for home mortgages.
Cook said that while the Federal Reserve has observed some vulnerabilities, the financial system in the United States is sustained by households and businesses.
“The financial system remains resilient, supported by strong balance sheets among households and businesses and high capital levels across the banking system,” Cook said at the event. “Earlier this month, the Fed issued the most recent version of our semiannual Financial Stability Report. That report affirmed the system is resilient, while also noting some of the same risks and vulnerabilities we have seen in recent reports.”
Cook said one vulnerability in the current market is a decrease in the value of businesses’ current assets and liabilities.
“Currently, my impression is that there is an increased likelihood of outsized asset price declines,” Cook said. “However, given the system’s overall resilience, I do not see the kinds of weaknesses that played out so painfully in the Great Recession, and thus, I do not see potential asset price declines as posing risks to the financial system.”
Cook said another area of concern in the current system is the growing use of private credit, wherein businesses finance their debts directly with non-bank lenders through privately negotiated contracts.
“Fed staff estimate that, over the past five years, private credit has roughly doubled,” Cook said. “Whenever we observe such rapid growth in credit over such a short period of time, it draws our attention.”
Still, Cook said, the growth of this type of credit has created more opportunities for firms.
“The growth in nonbank lending to privately held businesses has increased credit access,” Cook said. “As a result, private businesses that have difficulty securing a loan from a bank can continue to grow their businesses with loans from private credit providers.”
Cook said that while the complexities of private credit could spread losses from the sector to the broader market, she is not concerned.
“The increased complexity and the interconnections with leveraged financial entities create more channels through which unexpected losses in private credit could spread to the broader financial system,” Cook said.
“What do recent trends in the sector suggest about the potential for such losses and financial stability risks?” Cook added. “I do not currently see the potential for private credit to contribute to an unexpected credit crunch in the same way that the asset-backed commercial paper market did in 2008.”
Cook said the use of AI in the market could result in market manipulation that favors those using the technology.
“Researchers have also pointed to the risk that generative AI could engage in collusion and market manipulation, rigging the system to favor those employing the technology,” Cook said. “Recent theoretical studies find that some AI-driven trading algorithms can indeed learn to collude without explicit coordination or intent, potentially impairing competition and market efficiency.”
Cook said that while there are concerns about AI, surveillance techniques are showing promise to thwart collusion efforts.
“The good news here is that major electronic trading platforms are also rapidly adopting advanced machine learning techniques to detect market manipulation and collusive behavior,” Cook said. “Thanks to improving surveillance capabilities, AI technology could ultimately strengthen market integrity and enhance market liquidity.”
Cook said that while the financial system is still fundamentally strong, the vulnerabilities of elevated asset values, hedge fund activity and private credit are factors the Federal Reserve will continue to monitor.
“The financial system remains resilient,” Cook said. “Yet, vulnerabilities from elevated asset values, growth and complexity in private credit markets, and the potential for hedge fund activity to contribute to Treasury market dislocation warrant attention.”
“These emerging vulnerabilities also occur against a backdrop of very significant technological change,” Cook added. “These innovations may ultimately improve financial stability but also involve transitions and potential challenges that may require thoughtful and deliberate navigation.”
