US Federal Reserve Chair Janet Yellen warned today that a British vote to break with the European Union could rile markets and have an impact on economic growth.
Two days before Thursday's Brexit referendum, she told a US Senate panel that the issue was one of a number of important risks facing the US and the global economy.
"One development that could shift investor sentiment is the upcoming referendum in the United Kingdom," she said. "A UK vote to exit the European Union could have significant economic repercusssions," she cautioned.
Yellen counted the risks from the Brexit vote as one reason why the Fed will continue to move very cautiously on raising interest rates and tightening US monetary policy.
She said in today's testimony that US growth has picked up noticeably in the second quarter from the sluggish pace at the beginning of the year.
Nevertheless, she said economic growth has been uneven and clear downside risks remain a threat.
"Considerable uncertainty about the economic outlook remains," she said in prepared testimony. "The latest readings on the labour market and the weak pace of investment illustrate one downside risk - that domestic demand might falter," she said.
Added to that, Yellen said, are the challenges of slower growth and reform hurdles in China, and the referendum in Britain on Thursday, which could radically alter Europe's economic framework.
She was speaking days after the Fed's policy body, the Federal Open Market Committee, turned more dovish in its view of the economy as it again kept its benchmark interest rate locked at an ultra low level on Wednesday.
While Yellen reiterated the Fed's expectations that it could increase the federal funds rate twice before the end of the year, ending 2016 close to 1%, she also highlighted risks to the longer term.
She noted that a number of prominent economists have argued that slow productivity growth in the US will continue in the future, dampening overall growth. "We cannot rule out" that possibility, she said.
And she said that as long as other domestic weaknesses persist, like slow household formation and business investment, and if global risks remain significant, then the Fed needs to hold interest rates ultra-low "to keep the economy operating near its potential."
Yellen made her comments in semi-annual testimony to Congress on the state of the US economy and Federal Reserve policy.
Despite her concerns over the short-term outlook, she reiterated that she and the Fed were fairly confident in the medium term outlook that growth will remain moderate, that companies will continue to hire workers at a steady pace and that inflation, which has been overly weak, will turn upward.
