Janet Yellen has reiterated her view that the US Federal Reserve will move slowly and steadily when it comes to raising interest rates, citing fears over the UK’s EU referendum as one potential drag on the US economy.
In her appearance before the Senate Banking Committee this afternoon, the Fed chair pointed to “considerable uncertainty about the economic outlook”, and continued to state that interest rates in the world’s largest economy will increase only slowly.
Turning to this week’s EU referendum, Yellen said in her prepared statement to the Senators: “One development that could shift investor sentiment is the upcoming referendum in the UK. A UK vote to exit the EU could have significant economic repercussions.”
Answering questions from the Committee, she added: “It is an important relationship, [a vote to Leave] would be significant for the UK and Europe as a whole.
Read more: Has the Fed left it too late to raise rates?
“I think it would usher in a period of uncertainty and it is very hard to predict … [it could also lead to] a period of market volatility that would negatively affect financial conditions and the US economic outlook.
"Most analyses suggest it would have negative economic repercussions and spillovers to Europe. Financial market uncertainties could result in a kind of risk-off sentiment that we would see impacts on financial markets that we might see flight to safety flows that could push up the dollar and other so-called safe haven currencies."
Yellen has tentatively mentioned the possibility of Brexit in recent weeks. At the Fed’s most recent decision to hold the federal funds target rate at between 0.25 per cent and 0.5 per cent, Yellen mentioned the EU referendum and, in a subtle hint of the importance she places on the issue, invited a UK reporter to ask her the first question at the following press conference.
When asked whether she believed Brexit could tip the US economy into a recession, Yellen said: "I don't think that's the most likely case, but we just don't really know what will happen."
When the Fed first raised rates last December it outlined that there could be three or four further rate hikes this year. Markets are still waiting for the second, and recent estimates show there could only be one more rate hike in 2016.
The extra hikes were initially knocked off course by turmoil in financial markets in the first quarter of the year.
The Fed had looked likely to raise rates for the second time since the crisis in either June or July, but a disappointing jobs report killed the chances of a hike at last week’s meeting and has made a July raise a remote possibility.
American stock markets were broadly unchanged during Yellen’s testimony to the Senate.