Yellen sees risks to financial stability, says effects of a Brexit unclear

Federal Reserve Chair Janet Yellen took a cautious approach to rate policy ahead, highlighting Brexit risks and the fragile state of the global economy.

“Even given moderate financial vulnerabilities, a number of possible external shocks, including if the United Kingdom chooses to leave the European Union in a pending referendum, could pose risks to financial stability,” the Fed said in its semi-annual economic report to Congress.

It is unclear what effect a vote to leave the EU would have, she said, but noted it could lead to volatility in world markets "that would negatively affect financial conditions and the U.S. economy."  Yellen said that if there were an economic shock to the US economy, Fed would rely on existing tools.   

Even though, Yellen noted that economic output has picked up in the second quarter and that low interest rates and job gains will likely support consumer spending, she said the Fed is to assess economic data and reiterated the bank will proceed cautiously in raising rates.

Yellen says the US labour market has shown a loss of momentum over the last several months and wants to see an improvement before hiking rates again.