YELLEN: A Brexit would shake global markets and have huge economic consequences (TLT, TLO, USD, DXY, SPY, SPX, DJI, IXIC, IWIM)
AP/Evan Vucci
Federal Reserve chair Janet Yellen testified before the Senate Banking Committee in the first of her two-day, semi-annual testimony on Capitol Hill.
On the big issue dominating markets right now — Brexit — Yellen said a UK vote to leave the European Union would have "significant economic repercussions," and create market volatility.
An exit from the EU could have a negative ripple effect on other economies in the region.
Yellen didn't recommend which way the vote should swing on Thursday, saying the Fed will be watching the economic fallout closely.
In opening remarks, Yellen repeated that the Fed will be cautious in raising interest rates, even as it expects data on growth, employment and inflation to improve.
None of this was new, since it was the fourth time in only a few weeks that Yellen addressed markets.
The Fed's latest monetary-policy report put the stock market on watch, noting that forward price-to-earnings ratios are above the median level of the last three decades.
Q&A
The Fed's report also included a section on minority unemployment rates; during her last testimony, the Congressional Black Caucus grilled Yellen on black unemployment. Yellen said Tuesday that it's important to the Fed that employment gains are broad-based, and that its own internal hiring makes room for diversity.
On a question about forward guidance, Yellen said again that the Fed's projections are not a commitment. Some critics have said the Fed has lost credibility because the economy has not always evolved according to its forecasts.
Yellen countered an argument from Senator Bob Corker (R-TN) that the Fed's reinvestment of its bonds is effectively a fourth round of quantitative easing.
She said the Fed has the legal authority to use negative interest rates — another stimulative tool that could theoretically be employed — but sees no need to use them.
On Puerto Rico's debt crisis, Yellen said the Fed's authority is extremely limited and it won't be appropriate to grant loans.
US Sen. Elizabeth Warren (D-Massachusetts) asked whether the Fed can commit to enforcing consequences on the big banks if they fail to resolve problems identified in their living wills. Yellen declined to make a commitment, saying the Fed will consider the appropriate action if the October deadline is missed.
On Wednesday, Yellen will face the House Financial Services Committee.