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Biggest market risks are from DC: Economist

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Data released on Thursday showed a big uptick in the economy, with GDP growing at a better-than-expected rate in the second quarter. However, there will always be risks in the market. Scott Brown, chief economist at Raymond James, said events from Washington pose the greatest risks for the remainder of the year.

“The bigger worry is the debt ceiling. Treasury indicated the ceiling has to be raised by mid-October,” Brown said, “but if Congress doesn’t get its act together, you could at least see a technical default of the U.S., and that could have very substantial repercussions in the financial markets.”

The labor market has played a key role in Fed policy. Brown said there’s been a huge amount of slack in the labor market. Although the U.S. is on its way to improvement, he said, the real issue has been job creation.

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“We haven’t made up much of the ground that was lost in the economic downturn,” he said, noting that the U.S. still has high levels of long-term employment, and among teenagers and young adults.

Brown said the market’s focus on the end to Quantitative Easing has been somewhat bizarre: “From the beginning, the Fed has been clear that the asset purchase program was never meant to be indefinite.”

He said the idea behind QE was to get the ball rolling, gain momentum in the recovery and to see some improvement in the labor market. Brown said that once the program is over, the Fed should be relied on for conventional monetary policy, which means low short-term interest rates in order to provide ongoing support for recovery.

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