The Federal Reserve's latest Financial Stability Report reveals growing concerns about artificial intelligence (AI) within the financial system. According to the report, 50% of surveyed market participants now view AI as a potential shock, up from 30% in the previous survey. This places AI among the top-cited risks for the next 12 to 18 months, alongside geopolitical tensions and oil shocks. The report highlights that AI-related risks could impact asset valuations, leverage, labor markets, and credit conditions. Debt-funded AI spending is seen as a potential source of increased leverage across companies and financial markets. Additionally, the widespread adoption of AI may exert pressure on employment in certain sectors, raising concerns about labor market stability. While the Fed does not predict an AI-driven crisis, the survey indicates that market professionals are closely monitoring how AI-related debt could affect financial conditions. The findings underscore AI's growing significance in the Fed's financial stability considerations, reflecting broader market apprehensions about its potential impact.