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Fed policymakers see economy plateauing, risks ahead

Kitco News

(Reuters) - The U.S. economy faces stiff headwinds in staging a strong recovery as a surge in coronavirus cases without a vaccine in sight and few treatment options will likely limit consumer spending and the labor market, U.S. Federal Reserve policymakers said on Tuesday.

Business owners are “nervous again,” Ralph Bostic, president of the Atlanta Federal Reserve Bank, said in webcast remarks to the Tennessee Business Roundtable. “There is a real sense this might go on longer than we have planned for.”

The next three to six weeks could prove critical in the pace of an economic recovery that Bostic suggested may plateau sooner and at a lower pace than has been expected.

At an event sponsored by the National Association of Business Economists, San Francisco Fed President Mary Daly sounded a similar tone.

After large swathes of the U.S. economy reopened and trillions of dollars in fiscal stimulus began to reach the unemployed and hard-hit businesses, the economy created 4.8 million jobs in June.

Those gains mean the labor market is “in better shape than I thought it might be – but it’s nowhere close to where we need to be,” Daly said, noting that unemployment, at 11.1%, is extremely elevated.

With the virus still circulating, there’s a limit to how much people will want to risk their health eating out or undertaking other potentially risky economic activity, she said. Daly noted the “untenable” position of state and local governments, which will need to cut staff as tax revenue declines and spending on safety net services increases.

“I am assuming that we’ll level off at some level that’s not where we want to be,” Daly said.

A Fed survey released Tuesday morning showed Americans may be hunkering down for a longer-than-expected fight against the virus and its economic fallout.

The poll of 1,869 people took place between June 3 and 12, as the first signs emerged of a newly growing coronavirus caseload, showed 46% of respondents think it will take more than a year for conditions to return to normal. That is up from 35% in an April survey.

At the end of July, some of the government programs to support businesses and families during the pandemic will expire, most notably the $600-a-week addition to unemployment benefits.

If those supports are not extended, Richmond Fed President Thomas Barkin said Tuesday, the economy faces “some very real risks” as some businesses and households struggle to pay bills and repay debt.

Bostic agreed.

“It is pretty clear this is going to go on beyond the expiration of relief efforts,” Bostic said, adding that as the fact becomes clear, elected officials might “strongly consider doing more.”

Reporting by Howard Schneider, Lindsay Dunsmuir and Ann Saphir; Editing by Leslie Adler

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