A man walks past the U.S. Capitol Building in Washington December 17, 2012.

WASHINGTON | Wed Jan 2, 2013 4:52pm EST

WASHINGTON (Reuters) - Washington has steered clear of severe austerity measures for now, reducing the risk of recession, but a clutch of U.S. tax hikes will nevertheless be a drag on economic growth this year.

The U.S. Congress approved a deal late on Tuesday to scale back some $600 billion in scheduled tax hikes and government spending cuts known as the "fiscal cliff."

Analysts said the package at least marked a temporary reprieve for the economy, and investors charged into U.S. stocks, pushing the Standard & Poor's 500 up 2.5 percent on Wednesday.

However, the legislation, which is expected to be signed into law soon by President Barack Obama, will raise taxes on most Americans through a hike in the payroll tax used to fund Social Security pensions for the elderly.

Economists say the U.S. economy would likely grow much more quickly if the government was not raising taxes.

The payroll tax hike alone - which comes from the expiration of stimulus measures enacted to fight the 2007-09 recession - could push the average household tax bill up by about $700 this year, according to estimates from the Tax Policy Center, a Washington think tank.

That will likely reduce consumer spending and subtract about three quarters of a percentage point from economic growth, said Joseph LaVorgna, an economist at Deutsche Bank in New York.

The package will also raise income tax rates for households making over $450,000 a year, although rates will remain at 2012 levels for everyone else.

The other modest tax hikes, including a tax on wealthy households to help pay for Obama's 2010 healthcare reform law, could shave another quarter of a point from growth.

"We are still getting some fiscal drag this year," LaVorgna said.

Even so, the tenor of the deal was widely anticipated by economists in financial centers like Wall Street, and appears to support forecasts for economic growth of around 2 percent this year.

Barclays Capital said it was holding its growth forecast for this year at 2.1 percent.

A Reuters poll of analysts in December produced a median forecast for 1.9 percent U.S. economic growth in 2013.

"There seems to be a collective sigh of relief," strategists at Brown Brothers Harriman wrote in a note to clients. "The full force of the U.S. fiscal cliff - (which) could have dragged the world's largest economy into a recession - has been averted."

The Congressional Budget Office had estimated that completely running over the fiscal cliff would have caused the economy to contract 0.5 percent this year. The full brunt of the cliff would have hit the average U.S. household with about an additional $3,500 in taxes this year, according to the Tax Policy Center.

Still, U.S. lawmakers only agreed to delay scheduled cuts on government spending on the military, education and other areas for another two months.

Many economists think ongoing talks in Congress will eventually lead these spending cuts to be put off until next year, presumably once lawmakers reach a deal to reduce spending over the longer term while granting the government authority to increase the national debt.

Then again, they might not reach a deal, and the planned spending cuts would then cut deeply into economic growth in the second half of the year.

"While we retain our 2013 GDP forecast, we also retain the view that fiscal policy presents downside risks to growth," analysts at Barclays said in a research note.

Some economists noted that tax policy now looks more stable for the majority of Americans, removing some of the uncertainty that may have held back spending by consumers and business in recent months.

At the same time, with an axe still hanging above billions of dollars in government spending, many businesses are likely to remain cautious.

Analysts say financial markets are likely to remain on tenterhooks until Congress raises the nation's $16.4 trillion debt ceiling, which the U.S. Treasury confirmed had been reached on Monday.

The government likely will need to raise the debt ceiling by February or March to remove the risk albeit remote, of the country defaulting on its debt. Such an extreme scenario would likely make it more expensive for governments and companies alike to borrow money, hurting the economy.

"We have some more certainty, but there are still quite a few questions left to be resolved," said Dana Saporta, an economist at Credit Suisse.

(Additional reporting by Jonathan Spicer in New York; Editing by Leslie Adler)

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Screenwriter Mark Boal and Director Kathryn Bigelow pose for photos for their new film 'Zero Dark Thirty' in New York December 4, 2012.

WASHINGTON | Wed Jan 2, 2013 7:13pm EST

WASHINGTON (Reuters) - After the Senate Intelligence Committee's chairwoman expressed outrage over scenes that imply "enhanced interrogations" of CIA detainees produced a breakthrough in the hunt for Osama bin Laden, the panel has begun a review of contacts between the makers of the film "Zero Dark Thirty" and CIA officials.

In the latest controversy surrounding the film, Reuters has learned that the committee will examine records charting contacts between intelligence officials and the film's director Kathryn Bigelow and screenwriter Mark Boal.

Investigators will examine whether the spy agency gave the filmmakers "inappropriate" access to secret material, said a person familiar with the matter. They will also probe whether CIA personnel are responsible for the portrayal of harsh interrogation practices, and in particular the suggestion that they were effective, the person said.

The intelligence committee's Democrats contend that is factually incorrect.

Zero Dark Thirty is a dramatized account of the hunt for al Qaeda leader bin Laden and the May 2011 U.S. Navy SEAL raid in which he was killed. Government e-mails and memoranda released to the conservative group Judicial Watch show that both the CIA and Pentagon gave the filmmakers extensive access.

But the film has also produced a series of awkward political headaches for President Barack Obama. Early on, Obama's Republican critics suggested it was a gimmick to boost his re-election campaign. But now, some of Obama's liberal supporters are attacking the film and officials who cooperated with its creators for allegedly promoting the effectiveness of torture.

The CIA had no comment on the latest congressional inquiry regarding the film.

One of the intelligence officials whom the documents show as having met with the filmmakers is Michael Morell, the CIA's deputy director at the time and now the agency's acting chief.

Current and former national security officials have said Morell, a highly regarded agency veteran, is a favorite to succeed retired Gen. David Petraeus as the agency's director.

CLOUD OVER MORELL?

But some of the same officials now say the controversy over the film's content has cast a cloud over Morell's prospects.

Last month, Intelligence Committee chairwoman Sen. Dianne Feinstein joined Michigan Sen. Carl Levin, chairman of the Senate Armed Services Committee, and former Republican Presidential candidate Sen. John McCain in sharply condemning what they described as "particularly graphic scenes of CIA officers torturing detainees" in Zero Dark Thirty.

The film has been screened in New York and Los Angeles but does not premiere nationwide until January 11.

In a December 19 letter to the chairman and CEO of Sony Pictures Entertainment, which produced the film, the senators alleged it was "grossly inaccurate and misleading in its suggestion that torture resulted in information that led to the location" of bin Laden.

The three senators claim Zero Dark Thirty "clearly implies that the CIA's coercive interrogation techniques were effective in eliciting important information related to a courier" for bin Laden, who would unknowingly lead the agency to his compound in Abbottabad, Pakistan.

The senators assert, however, that their own review of CIA records proves that the story told in the film is "incorrect" and "the CIA learned of the existence of the courier, his true name and location through means unrelated to the CIA detention and interrogation program."

Sony, in response, released a statement from Bigelow and Boal, which said in part: "We depicted a variety of controversial practices and intelligence methods that were used in the name of finding bin Laden.

"The film shows that no single method was necessarily responsible for solving the manhunt, nor can any single scene taken in isolation fairly capture the totality of efforts the film dramatizes."

Boal said in an email that he was unaware of the Senate committee's interest and had had no contact with the panel.

The person familiar with the committee's plan to review administration dealings with the filmmakers said initially this would involve reviewing uncensored copies of CIA records regarding the film. The committee presently does not plan to contact the filmmakers directly, the source said.

A 'DRAMATIZATION'

Last year, the CIA and Pentagon, in response to a freedom of information request from Judicial Watch, released hundreds of pages of internal documents discussing the agencies' arrangements for dealing with Bigelow and Boal.

The documents, many heavily redacted, show that top CIA and Pentagon officials, including Morell and Michael Vickers, now the Pentagon's intelligence chief, talked to the filmmakers.

One Pentagon email exchange with Ben Rhodes, a senior White House national security aide, said Boal had been briefed by CIA officials "with the full knowledge and full approval/support" of Leon Panetta, who served as CIA director and then Secretary of Defense while the film was being prepared.

A second person familiar with the matter said the committee had acquired copies of the CIA records last year.

The committee originally obtained the uncensored records at the request of Republicans, who were looking for evidence that intelligence or Pentagon personnel inappropriately shared classified information with the filmmakers, this source said.

Other Congressional Republicans, most notably Representative Peter King, outgoing chairman of the House Committee on Homeland Security, complained loudly about dealings between the Obama administration and the filmmakers following reports it would be released shortly before the 2012 Presidential election. Ultimately, the film was not released until after the election.

Two days after the Senators made public their letter to Sony, the CIA released a statement by Morell, who said that Zero Dark Thirty was a "dramatization, not a realistic portrayal of the facts," and that while the agency had "interacted" with the filmmakers, it did not "control the final product."

Morell's statement was equivocal on whether "enhanced interrogations" had produced information critical to finding bin Laden.

"Whether enhanced interrogation techniques were the only timely and effective way to obtain information from those detainees, as the film suggests, is a matter of debate that cannot and never will be definitively resolved," Morell added.

(Editing by Warren Strobel and Todd Eastham)

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1 of 12. Speaker of the House John Boehner (R-OH) walks with House Majority Leader Rep. Eric Cantor (R-VA) to a meeting with House Republicans on the ''fiscal cliff'' budget deal on Capitol Hill in Washington on January 1, 2013. Washington's last-minute scramble to step back from a ''fiscal cliff'' ran into trouble on Tuesday as Republicans in the House of Representatives balked at a deal to avert a budget crisis.

WASHINGTON | Thu Jan 3, 2013 12:44am EST

WASHINGTON (Reuters) - President Barack Obama and congressional Republicans face even bigger budget battles in the next two months after a hard-fought "fiscal cliff" deal narrowly averted devastating tax increases and spending cuts.

The agreement, approved late on Tuesday by the Republican-led House of Representatives and signed by Obama on Wednesday, was a victory for the president, who had won re-election in November on a promise to address budget woes, partly by raising taxes on the wealthiest Americans.

But it set up potentially bruising showdowns over the next two months on spending cuts and an increase in the nation's limit on borrowing. Republicans, angry the fiscal cliff deal did little to curb the federal deficit, promised to use the debt-ceiling debate to win deep spending cuts next time.

Republicans believe they will have greater leverage over Democrat Obama when they must consider raising the borrowing limit in February because failure to close a deal could mean a default on U.S. debt or another downgrade in the U.S. credit rating. A similar showdown in 2011 led to a credit downgrade.

"Our opportunity here is on the debt ceiling," Republican Senator Pat Toomey of Pennsylvania said on MSNBC. "We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean."

But Obama and congressional Democrats may be emboldened by winning the first round of fiscal fights when dozens of House Republicans buckled and voted for major tax hikes for the first time in two decades.

"We believe that passing this legislation greatly strengthens the president's hand in negotiations that come next," House Minority Leader Nancy Pelosi told NBC in an interview to air on Thursday.

Obama, who is vacationing in Hawaii, signed the legislation late on Wednesday, the White House said.

"We received the bill late this afternoon, and it was immediately processed. A copy was delivered to the president for review. He then directed the bill be signed by autopen," a senior administration official said. An autopen is an automatic pen with the president's signature.

Deteriorating relations between leaders in the two parties do not bode well for the more difficult fights ahead. Vice President Joe Biden and Republican Senate leader Mitch McConnell had to step in to work out the final deal as the relationship between House Speaker John Boehner and Obama unraveled.

Senate Majority Leader Harry Reid also drew the ire of Boehner, who told Reid in the White House to "Go fuck yourself" after a tense meeting last week, aides said. His remark came after the Democrat accused Boehner of running a "dictatorship" in the House.

Bemoaning the intensity of the fiscal cliff fight, Obama urged "a little less drama" when the Congress and White House next address budget issues like the government's rapidly mounting $16 trillion debt load. He vowed to avoid another divisive debt-ceiling fight before the late-February deadline for raising the limit.

"While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up," Obama said before he headed to Hawaii to resume an interrupted vacation.

NOT TIME TO CELEBRATE

Analysts warned that might not be so easy. "While the markets and most taxpayers may breathe a sigh of relief for a few days, excuse us for not celebrating," said Greg Valliere, chief political strategist at Potomac Research Group.

"We have consistently warned that the next brawl represents a far greater threat to the markets - talk of default will grow by February, accompanied by concerns over a credit rating downgrade," he said.

Rating agencies Moody's Investors Service and Standard & Poor's said the "fiscal cliff" measure did not put the budget on a more sustainable path. The International Monetary Fund said raising the debt ceiling would be a critical move.

"More remains to be done to put U.S. public finances back on a sustainable path without harming the still fragile recovery," said Gerry Rice, a spokesman for the IMF.

Financial markets that had been worried about the fiscal cliff showdown welcomed the deal, with U.S. stocks recording their best day in more than a year. The S&P 500 achieved its biggest one-day gain since December 20, 2011, pushing the benchmark index to its highest close since September 14.

The debate over "entitlement" programs is also bound to be difficult. Republicans will be pushing for significant cuts in government healthcare programs like Medicare and Medicaid for retirees and the poor, which are the biggest drivers of federal debt. Democrats have opposed cuts in those popular programs.

"This is going to be much uglier to me than the tax issue ... this is going to be about entitlement reform," Republican Senator Bob Corker of Tennessee said on CNBC.

"Now that we have this other piece behind us - hopefully - we'll deal in a real way with the kinds of things our nation needs to face," he said.

The fiscal cliff crisis ended when dozens of Republicans in the House relented and backed a bill passed by the Democratic-controlled Senate that hiked taxes on household income above $450,000 a year. Spending cuts of $109 billion in military and domestic programs were delayed for two months.

Economists had warned that the fiscal cliff of across-the-board tax hikes and spending cuts would have punched a $600 billion hole in the economy this year and threatened to send the country back into recession.

Dozens of House Republicans reluctantly approved the Senate bill, which passed by a bipartisan vote of 257-167 and sent it to Obama to sign into law.

Peter Huntsman, chief executive of chemical producer Huntsman Corp, said the vote did little to reduce the U.S. budget deficit and would hinder growth.

"We haven't even begun to address the basic issues behind this," Huntsman told Reuters. "We haven't fixed anything. All we've done is addressed the short-term pain.

The vote underlined the precarious position of Boehner, who will ask his Republicans to re-elect him as speaker on Thursday when a new Congress is sworn in. Boehner backed the bill, but most House Republicans, including his top lieutenants, voted against it.

The Ohio congressman also drew criticism on Wednesday from his fellow Republicans for failing to schedule a House vote on a bill passed by the Senate that would provide federal aid to Northeastern states hit by the storm Sandy.

(Additional reporting by Susan Heavey, Richard Cowan in Washington and Gabriel Debenedetti and Ernest Scheyder in New York, Editing by Alistair Bell, Peter Cooney and Mohammad Zargham)

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1 of 7. U.S. Secretary of State Hillary Clinton (L) leaves New York Presbyterian Hospital with husband, Bill (TOP), and daughter, Chelsea (C), in New York, January 2, 2013. The secretary of state, who has not been seen in public since Dec. 7, was revealed on Sunday evening to be in a New York hospital under treatment for a blood clot that stemmed from a concussion she suffered in mid-December.

WASHINGTON | Wed Jan 2, 2013 7:58pm EST

WASHINGTON (Reuters) - Secretary of State Hillary Clinton was discharged from a New York hospital on Wednesday after being treated for a blood clot near her brain and her doctors expect her to make a full recovery, the State Department said.

Clinton, who has not been seen in public since December 7, was at New York-Presbyterian Hospital under treatment for a blood clot behind her right ear that stemmed from a concussion she suffered in mid-December, the department said on Sunday.

The concussion was the result of an earlier illness, described by the State Department as a stomach virus she had picked up during a trip to Europe that led to dehydration and a fainting spell after she returned to the United States.

"Secretary Clinton was discharged from the hospital this evening. Her medical team advised her that she is making good progress on all fronts, and they are confident she will make a full recovery," Philippe Reines, a deputy assistant secretary of state, said in a statement.

Reines said Clinton was "eager to get back to the office."

Earlier, State Department spokeswoman Victoria Nuland told reporters at her daily briefing Clinton had been talking with her staff by telephone and receiving memos.

Clinton also spoke to two foreign officials - the U.N. envoy on Syria and the prime minister of Qatar - on Saturday, the day before the State Department disclosed the blood clot and her stay at the hospital.

In a statement released by the State Department on Monday, Clinton's doctors said she was being treated with blood thinners and would be released from the hospital once the correct dosage had been determined.

(Reporting by Arshad Mohammed; Editing by Sandra Maler and Todd Eastham)

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A statue of the United States first President, George Washington, is seen under the Capitol dome in Washington January 2, 2013.

WASHINGTON | Thu Jan 3, 2013 1:11am EST

WASHINGTON (Reuters) - The new 113th U.S. Congress, which convenes on Thursday, is set to take a fresh crack at a number of old, and highly contentious, issues, such as gun control, immigration, the record debt, tax reform and the farm bill.

Here's a look:

GUN CONTROL

President Barack Obama vows to crack down on gun violence in the wake of the school massacre last month in Newtown, Connecticut, the latest in a series of shooting rampages over the past decade.

According to a USA Today/Gallup Poll, 58 percent of Americans now back tougher gun laws, but 51 percent oppose Obama's call to outlaw so-called assault weapons.

A sharply divided Congress is awaiting a broad review of gun violence headed by Vice President Joe Biden.

IMMIGRATION

Hispanic voters last year helped Obama win a second term and Democrats to increase their clout in Congress.

Republicans took notice and want to win Hispanic support in the 2014 elections. One step toward that goal would be for Republicans to become more open to immigration reform.

The big question is how far Republicans would go to provide a path toward citizenship for illegal immigrants, estimated to number up to 12 million in the United States.

SEQUESTRATION

The White House and Congress managed to cut a deal on the "fiscal cliff" by agreeing to a two-month delay to sequestration - automatic spending cuts that were set to take effect on January 1.

Obama and lawmakers now have until March 1 to reach agreement on about $85 billion in spending reductions. If they do not, they will see across-the-board ones kick in, about evenly split between military and domestic programs.

DEBT LIMIT

Obama and Congress likely have until the end of February to raise the U.S. debt limit, now at $16.4 trillion.

Failure to do so would result in an unprecedented U.S. default, a move likely to rattle financial markets worldwide.

Obama says he will refuse to allow the debt limit to become a political bargaining tool again.

But Republicans do not seem be willing to raise it without extracting major spending cuts, mostly from government programs such as Social Security and Medicare.

FARM BILL

Congress gave itself a new deadline, September 30, to complete an overdue five-year, $500 billion farm bill that withered in election-year acrimony in 2012.

The House version proposed the deepest cuts in a generation for food stamps for the poor. But fiscal conservatives want more cuts in food stamps as well as farm subsidies.

The bills produced last year by the House and Senate agriculture committees would have cut between $23 billion and $35 billion. They will dig deeper in the months ahead.

It will be the first time Congress began work on a farm bill in one session and had to refile it in the new session.

HURRICANE SANDY RELIEF

Under pressure from fellow Republicans inside and outside of Congress, including New Jersey Governor Chris Christie, the Republican-led House is expected to move quickly in coming weeks to approve a long-delayed relief package for victims of superstorm Sandy in New York, New Jersey and Connecticut.

SENATE FILIBUSTER

Senate Majority Leader Harry Reid is fed up with Republican procedural roadblocks commonly known as filibusters.

So Reid, to the outrage of Republicans, vows to try to change the rules - unless both sides enter some sort of an agreement to make the chamber work more efficiently.

VIOLENCE AGAINST WOMEN

Obama's fellow Democrats will take another crack at trying to renew the 1994 Violence Against Women Act, which was championed nearly two decades ago by Biden, then a senator.

The measure is designed to combat domestic abuse, but became a legislative vehicle in Congress last year for Democrats and Republicans to jockey for political position.

(Reporting By Thomas Ferraro; Editing by Marilyn W. Thompson and Peter Cooney)

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The facade of the New York Times building is seen in New York, November 29, 2010.

NEW YORK | Wed Jan 2, 2013 5:18pm EST

NEW YORK (Reuters) - A federal judge on Wednesday rejected The New York Times' bid to force the U.S. government to disclose more information about its targeted killing of people it believes have ties to terrorism, including American citizens.

U.S. District Judge Colleen McMahon in Manhattan said the Obama administration did not violate the law by refusing the Times' request for the legal justifications for targeted killings, a strategy the Times said was first contemplated by the Bush administration soon after the attacks of September 11, 2001.

McMahon appeared reluctant to rule as she did, noting in her decision that disclosure could help the public understand the "vast and seemingly ever-growing exercise in which we have been engaged for well over a decade, at great cost in lives, treasure, and (at least in the minds of some) personal liberty."

Nonetheless, she said the government was not obligated to turn over materials the Times had sought under the federal Freedom of Information Act (FOIA), even though it had such materials in its possession.

"The Alice-in-Wonderland nature of this pronouncement is not lost on me," McMahon said in her 68-page decision.

The newspaper and two reporters, Charlie Savage and Scott Shane, had sued the government for details about the government's drone program, including the late 2011 killings of U.S. citizens Anwar al-Awlaki and his 16-year-old son Abdulrahman in separate strikes in Yemen.

Civil liberties groups have attacked the drone program, which deploys pilotless aircraft, as in effect a green light for the government to kill Americans without constitutionally required due process. U.S. Attorney General Eric Holder has rejected that contention.

Among the materials sought by the Times was a memorandum that the newspaper had in early October 2011 reported had been prepared by the U.S. Department of Justice's Office of Legal Counsel. The Times cited people who had read the document.

The Times said this memorandum had authorized the "legal targeting" of Anwar al-Awlaki, a U.S.-born Muslim cleric who joined al Qaeda's Yemen affiliate and directed many attacks.

APPEAL PLANNED

The Times said it plans to appeal McMahon's decision.

"We began this litigation because we believed our readers deserved to know more about the U.S. government's legal position on the use of targeted killings against persons having ties to terrorism, including U.S. citizens," New York Times assistant general counsel David McCraw said in a statement.

He said McMahon, despite ruling for the government, explained "eloquently ... why in a democracy the government should be addressing those questions openly and fully."

McMahon also rejected information requests in a parallel lawsuit by the American Civil Liberties Union. That group said it will appeal, and also has a lawsuit seeking information about targeted killings pending at the D.C. Circuit Court of Appeals.

"The public has a right to know more about the circumstances in which the government believes it can lawfully kill people, including U.S. citizens, who are far from any battlefield and have never been charged with a crime," Jameel Jaffer, deputy legal director of the ACLU, said in a statement.

Dean Boyd, a spokesman for the U.S. Department of Justice, said that agency is reviewing the decision.

PROGRAM ON "TIGHT LEASH"

Citing protections envisioned by the Constitution's framers, McMahon said there were "legitimate reasons, historical and legal" to question whether the administration could unilaterally authorize killings taking place outside a "hot" field of battle.

But she rejected the Times' argument that the administration could not rely on exemptions from having to disclose classified or privileged material by virtue of having made at least two dozen public statements about the targeted killing program.

Among these were Obama's statements in an online forum on January 30, 2012, that the government was "judicious" in its use of drones, and that the program was "kept on a very tight leash."

She also cited a speech on March 5, 2012, at Northwestern University School of Law in Chicago where Holder said the government could lawfully use lethal force in a foreign country against U.S. citizens who had senior operational roles in al-Qaeda and were "actively engaged" in efforts to kill Americans.

McMahon dismissed the entire case except for one small issue related to two unclassified memos.

The cases are New York Times Co et al v. U.S. Department of Justice, U.S. District Court, Southern District of New York, No. 11-09336; and American Civil Liberties Union et al v. U.S. Department of Justice in the same court, No. 12-00794.

(Reporting by Jonathan Stempel and Jennifer Saba in New York; Editing by Gary Hill, Bernard Orr)

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