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Fed’s Kaplan sees severe contraction ahead, more stimulus needed

(Reuters) – The U.S. economy will likely experience a “severe contraction” in the second quarter and continue to shrink some at the start the third quarter, Dallas Fed President Robert Kaplan said on Thursday, and that it was unclear how fast it would rebound.

“Clearly the consumer is going to come out of this weakened,” Kaplan said in an interview with CNBC.

U.S. unemployment, he said, will probably leap to the low or mid teens, from 3.5% in February, and while it should drop to around 8% by year’s end, “it will take us a while to work that off.”

The service sector, hit hard as authorities order much of the population to stay home to slow the spread of the virus, will also come out of the crisis “more challenged,” he said.

While rescue efforts for the economy, including the $2.2 trillion package passed last week, are essential, “there’s going to have to be more fiscal action to deal with that,” Kaplan said.

Asked about the possible cut in Russian and Saudi Arabian oil production announced by President Donald Trump just a few minutes before the interview, Kaplan said that substantial excess supply will remain a problem, and the energy sector will likely face consolidation and restructuring as business spending falls substantially.

“It will speed the time hopefully where supply demand can get into balance but we are long long way from that,” Kaplan said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama; Editing by Chizu Nomiyama)

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