Escalating geopolitical tensions pose a threat to the global financial system amid heightened risks of higher inflation and slower growth, the Federal Reserve warned on Friday.In its latest twice yearly Financial Stability Report, the US central bank flagged the potential for “broad adverse spillovers to global markets” in the event that the Middle East conflict and the war in Ukraine intensify or stresses emerge elsewhere.

“Escalation of these conflicts or a worsening in other geopolitical tensions could reduce economic activity and boost inflation worldwide, particularly in the event of prolonged disruptions to supply chains and interruptions in production,” the report said.

It added: “The global financial system could be affected by a pullback from risk-taking, declines in asset prices, and losses for exposed businesses and investors, including those in the US.”