Speaker of the House John Boehner (R-OH) (front, in green tie) walks with Congressman Dave Camp (R-MI) (R) after a meeting with House Republicans about a ''fiscal cliff'' deal on Capitol Hill in Washington January 1, 2013.

NEW YORK | Wed Jan 2, 2013 12:16am EST

NEW YORK (Reuters) - U.S. stocks are poised for gains to begin the year after the late passage of a bill to avoid harsh tax hikes that would have hit most Americans and crimped economic growth.

However, harsh reality awaits any euphoria that comes from avoiding the "fiscal cliff". In two months, battles over further spending cuts and, in particular, the U.S. federal debt limit will come to a head.

The House of Representatives voted for a bill passed on Monday by the Senate that will raise taxes on wealthy individuals and families and preserve certain other benefits that will, together, soften some of the blow that would have been sustained without an agreement to avoid the fiscal cliff.

That puts Wall Street in prime position to begin 2013 with a rally, even if thorny issues remain to be addressed in the coming months in Washington.

Asian markets extended gains modestly, with the MSCI Asia Pacific ex-Japan index of stocks up 1.7 percent. U.S. markets will not have a chance to react until 6 a.m. ET, when futures trading begins after the New Year's Day holiday.

"When you separate the fundamentals of the economy from the headlines, the fundamentals really suggest we can support higher prices in the new year," said Bill Vaughn, equity portfolio manager at Evercore Wealth Management in San Francisco.

The Standard & Poor's 500 stock index ended the year up 13 percent, its best gain since 2009, mostly shrugging off the debt-related worries that dominated headlines during the year.

Equity markets held up in the last two months of the year as well, expecting a resolution to head off $600 billion in spending cuts and tax hikes that could push the economy into recession if they stay in effect for long. While the deadline to avert the cliff was December 31, legislation can be formulated to retroactively prevent going over.

The back-and-forth in recent weeks has primarily been of concern to businesses, where confidence has eroded. Some slowing in economic growth due to the impasse is expected, but that may play into the hands of value investors if the market corrects in coming months.

"It appears as though politics will dominate for some time," said Richard Bernstein, chief executive of Richard Bernstein Advisors in New York. "That being said, equity market valuations already reflect this ... the stock market is attractive from my perspective."

Stock markets around the world were closed Tuesday because of New Year's Day. Some Republicans in the House had expressed concern on Tuesday afternoon that a bill would not be finished before U.S. markets open.

Many traders will still be away from their desks because of the holiday, indicating trading volume will stay near its recent low levels. The anemic action, coupled with uncertainty over the cliff, resulted in a spike of volatility in December, with the CBOE Volatility index jumping 13.5 percent in the month.

DEBT CEILING BATTLE REMAINS

The bill that passed does not contain the kind of spending cuts that many conservative Republicans favor in order to bring down the high U.S. federal debt.

Even as this battle recedes, markets will look ahead to another fight in the next few months, this time over whether Congress will approve an increase in the U.S. debt ceiling.

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

"The spending side fight looms and it will be tougher," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida. "The Republican caucus is tighter on that side."

Markets posted several days of sharp losses in the period surrounding the fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Economists at Goldman Sachs, in a note Tuesday, said the coming fight to raise the debt ceiling -- where Republicans are likely to demand spending cuts while President Obama pushes for more taxes -- "is likely to be at least as politically difficult as the last increase was in the summer of 2011."

During this fight, the markets have been less volatile, largely because the effects of the spending cuts and tax hikes will be gradual, and there was an ongoing expectation that a retroactive fix was in the offing.

(Additional reporting by David Gaffen, David Randall, Chuck Mikolajczak and Richard Leong; Editing by Neil Fullick and Paul Tait)

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A machine that makes bubble wrap padded envelopes is pictured at the Wrap-Tite manufacturing facility in Solon, Ohio July 13, 2012.

NEW YORK | Wed Jan 2, 2013 2:48pm EST

NEW YORK (Reuters) - U.S. manufacturing ended 2012 on an upswing despite fears about the "fiscal cliff," data showed on Wednesday.

U.S. factories returned to growth in December after contracting the previous month, the Institute for Supply Management said.

Its index of national factory activity rose to 50.7 up from 49.5 in November, narrowly beating the consensus forecast in a Reuters poll. The ISM index had fallen to a 40-month low in November.

"What is interesting in this report is that you would think the negative headlines surrounding the fiscal cliff would have put pressure on manufacturing," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

ISM's employment index rose to 52.7 from 48.4 in November, while its forward-looking new orders component kept at 50.3.

A separate measure of manufacturing also showed growth.

Financial data firm Markit's U.S. Manufacturing Purchasing Managers Index picked up to 54.0 from 52.8 in November. This was its highest point since May on a final basis despite just missing its preliminary estimate of 54.2.

"With recent indications that growth is also picking up in other key economies around the world, notably in emerging markets such as China and Brazil, and that the euro zone's economic crisis is easing, U.S. companies should benefit as stronger demand lifts exports in early 2013," said Markit Chief Economist Chris Williamson.

A rise in new orders fueled the faster growth, as one in five companies reported an increase. The Markit index's new orders component rose to 54.7 from 53.6 in November, its quickest increase since April.

The growth in U.S. manufacturing came in the face of fears late last year over the "fiscal cliff" of tax hikes and spending cuts, which would have kicked in at the start of 2013, risking a new U.S. recession.

Lawmakers struck a deal late on Tuesday, avoiding income tax hikes for most Americans and delaying the spending cuts for two months.

U.S. stock prices surged at the open on the congressional action, while yields on U.S. government debt rose.

"Now that Congress has come to an agreement. ... We expect that new orders and overall activity in the sector will accelerate. However, we also expect that growth in the first quarter will be slow due to continued uncertainty over spending cuts and the debt ceiling," said Thomas Simons, vice president and money market economist at New York brokerage Jeffries, in a note.

Despite Tuesday's deal, Congress still must debate how to handle the automatic spending cuts and resolve differences over the federal debt ceiling which could result in a new round of political wrangling.

The deal is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold.

Even as manufacturing grew, uncertainty remained for smaller businesses.

Borrowing by small U.S. businesses rose marginally in November, as the Thomson Reuters/PayNet Small Business Lending Index - which measures the overall volume of financing to small U.S. companies -- rose to 108.3 from a downwardly revised 107 in October, PayNet said.

"Small businesses were waiting to see what is happening with Washington. ... They were waiting for more consumer activity to emerge, really watching the front door for new sales to emerge and it doesn't look like any major new influx of sales came in - they have really been on hold," PayNet founder Bill Phelan said.

(Reporting by Gabriel Debenedetti; Additional reporting by Steven C. Johnson, Chris Reese, Julie Haviv, Jason Lange; Editing by Neil Stempleman)

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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 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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U.S. Senate Minority Leader Mitch McConnell (C) departs the senate floor with an aide after a senate vote in the early morning hours at the U.S. Capitol in Washington January 1, 2013.

CHICAGO | Wed Jan 2, 2013 8:22pm EST

CHICAGO (Reuters) - The U.S. Congress prevented hefty tax hikes and spending cuts with a "fiscal cliff" deal this week, but grassroots conservatives are already seeking 2014 primary challengers for high-profile Republican lawmakers who backed the deal.

Few challengers have yet come forward. But fiscally conservative activists irate at Republicans who voted to raise some taxes without cutting spending are casting about for opponents to Republicans including Senate Minority Leader Mitch McConnell and senators Saxby Chambliss of Georgia, Lindsey Graham of South Carolina and Lamar Alexander of Tennessee.

"Many people here have watched Mitch McConnell's voting record and are dissatisfied with what they've seen," said Eric Wilson, executive director of the Kentucky 9/12 project, a Tea Party group in McConnell's home state. "There are some potential candidates working in the background and doing the right thing" including visiting Kentucky's conservatives to gauge support.

Wilson declined to divulge names, citing McConnell's fundraising prowess that allowed him to amass almost $19 million for his 2008 re-election bid. McConnell could not be reach for comment.

"Anyone who sticks their neck out now will get their head cut off," he added. "But there are definitely people here with real potential."

In the 2010 midterm elections the Tea Party movement took the Republican "establishment" by surprise with high-profile primary victories over more conventional candidates and brought a wave of freshmen to the House of Representatives.

But despite successes in the primaries in 2012, most notably the defeat of Indiana's six-term Republican Senator Dick Lugar by state treasurer Richard Mourdock, conservative candidates fared poorly in the general election.

Tea Party supporters claim 2014 should be different as lower turnout in midterm years allows fiscal conservatives to punch above their weight.

"Presidential politics in 2012 sucked oxygen out of the conversation in local races," said Matt Kibbe, president of FreedomWorks, which coordinates with Tea Party groups around the country. "So to us, 2014 looks more like 2010."

After some disastrous showings by Tea Party candidates, most notably Christine O'Donnell in Delaware in 2010 who ended up running a television ad denying she was a witch, conservatives are on the lookout for credible candidates who can run effective campaigns and raise sufficient funds for a general election.

It is reasonable to expect challenges to some Republicans from the right in 2014, said James Henson, a politics professor at the University of Texas in Austin.

"Whether they use the name Tea Party or not is irrelevant," he said. "The DNA of their movement has now been spliced into the DNA of the Republican Party."

'IN MAJOR TROUBLE'

Previous battles in Congress have been marked by Tea Party activists around the country bombarding their elected representatives, mostly Republicans, calling on them to hold the conservative line.

Many did not bother ahead of the fiscal cliff deal, a bipartisan agreement to raise tax rates on incomes of more than $450,000 per household.

"We knew the Republican leadership would cave in," said Debbie Dooley, a coordinator at national umbrella group Tea Party Patriots and a founder of the Atlanta Tea Party. "So we didn't expend a lot of energy on this issue."

Instead, Dooley said activists in her home state of Georgia are focused on educating voters about America's spiraling debt and seeking a replacement for Saxby Chambliss, who was forced into a runoff election in 2008 and only narrowly managed to return to the Senate.

No one has announced a challenge to Chambliss, but Georgia representatives Tom Price and Paul Broun are seen as potential candidates. Chambliss could not be reached for comment.

"If a credible candidate comes forward, then Saxby Chambliss is in major trouble," Dooley said.

In South Carolina, Joe Dugan of the Myrtle Beach Tea Party said there are credible alternatives to Senator Lindsey Graham, including three representatives elected in 2010 who have been reliably conservative on most issues.

"I am over 90 percent certain that if there is a reliably conservative candidate in 2014 he will have my total support," against Senator Graham, Dugan said.

Tim Phillips, president of Americans for Prosperity which has backing from the billionaire oil and gas brothers Charles and David Koch, said it is too early to say whether the group will get involved in primary challenges in 2014.

But the group, which raised $140 million in 2012 compared to $51 million in 2011, will focus on educating voters in 2013 on how their representatives voted on the fiscal cliff and the upcoming U.S. debt limit debate.

"We aim to hold elected officials accountable," he said. "Lawmakers will not be judged solely on how they voted on the fiscal cliff, but it is a big vote to get wrong."

Some conservative activists admit they face a steep climb at best if they want to unseat their local Republican representative. The West Chester Tea Party in House Speaker John Boehner's district in southwestern Ohio, for instance, has begun looking for a challenger to him even though he amassed nearly $22 million for his 2012 re-election bid.

"We've been getting emails from around the district and around the country asking if this is the best we can do for a representative," West Chester Tea Party member Ann Becker said. "That's not an easy question to answer."

"It will be a David-versus-Goliath battle if we do find somebody, but nothing is impossible," she added.

Unlike Indiana's Dick Lugar, who refused to recant on key votes that angered Tea Party activists, Utah Senator Orrin Hatch tacked rightward to defeat a primary challenge in 2012.

The University of Texas' Henson said that in the months to come the behavior of Republican lawmakers who voted for the fiscal cliff may show how seriously they take the threat of primary challenges next year.

"We will have to see what kind of compensatory behavior we see from Republicans," Henson said. "I suspect we will see more conservative Republicans try to make up for the fiscal cliff by trying to revert to form on other issues."

(Editing by Alistair Bell and Lisa Shumaker)

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n">(Reuters) - Senate leaders have not yet been able to reach a deal to a avert a "fiscal cliff," and with time running out, it is uncertain if they will get one, a senior Senate aide said on Sunday.

Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell have been aiming to reach an agreement by 3 p.m. EST (2000 GMT) so that they can present it to previously scheduled closed-door meetings of their respective Democratic and Republican colleagues in an attempt to beat a New Year's Day deadline.

However, at this point, they still do not have an agreement, the aide said, speaking on condition of anonymity. (Writing by Thomas Ferraro; Editing by David Brunnstrom)

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1 of 15. A man walks past the U.S. Capitol Building in Washington December 17, 2012.

WASHINGTON | Mon Dec 31, 2012 1:27am EST

WASHINGTON (Reuters) - The U.S. Congress comes back on Monday without a deal to avert the "fiscal cliff" and only a few hours of actual legislative time scheduled in which to act if an agreement materializes.

Negotiations involving Vice President Joe Biden and Senate Republican leader Mitch McConnell appeared to offer the last hope for avoiding the across-the-board tax increases and draconian cuts in the federal budget that will be triggered at the start of the New Year because of a deficit-reduction law enacted in August, 2011.

A jolt from the financial markets could also prod the parties, as it has occasionally in the past.

"I believe investors will show their displeasure" at the lack of progress in Washington, said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action on Sunday. But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until Monday.

The main sticking point between Republicans and Democrats remained whether to extend existing tax rates for everyone, as Republicans want, or just for those earning below $250,000 to $400,000, as Democrats have proposed.

Also at issue were Republican demands for larger cuts in spending than those offered by President Barack Obama.

Hopes for a "grand bargain" of deficit-reduction measures vanished weeks ago as talks stalled.

While Congress has the capacity to move swiftly when motivated, the leaders of the U.S. House of Representatives and the Senate have left themselves little time for what could be a complicated day of procedural maneuvering in the event of an agreement.

House Speaker John Boehner has insisted that the Senate act first, but that chamber does not begin legislative business until about noon Monday.

OTHER BUSINESS ALSO ON AGENDA

And the cliff is not the only business on the House agenda. Farm-state lawmakers are seeking a one-year extension of the expiring U.S. farm law to head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

Relief for victims of Superstorm Sandy is waiting in line in the House as well, though it could still consider a Senate bill on assistance for the storm until January 2, the last day of the Congress that was elected in November 2010.

Expiring along with low tax rates at midnight Monday are a raft of other tax measures effecting tens of millions of Americans.

A payroll tax holiday Americans have enjoyed for two years looks like the most certain casualty as neither Republicans or Democrats have shown much interest in continuing it, in part because the tax funds the Social Security retirement program.

The current 4.2 percent payroll tax rate paid by about 160 million workers will revert to the previous 6.2 percent rate after December 31, and will be the most immediate hit to taxpayers.

A "patch" for the Alternative Minimum Tax that would prevent millions of middle-class Americans from being taxed as if they were rich, could go over the cliff as well. Both Republicans and Democrats support doing another patch, but have not approved one.

At best, the Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix. At worst, they could face higher taxes unless Congress comes back with a retroactive fix.

After Tuesday, Congress could move for retroactive relief on any or all of the tax and spending issues. But that would require compromises that Republicans and Democrats have been unwilling to make so far.

Obama said on Sunday he plans on pushing legislation as soon as January 4 to reverse the tax hikes for all but the wealthy.

(Editing by Christopher Wilson)

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U.S. President Barack Obama and first lady Michelle Obama visit military personnel and their families as they walk into Anderson Hall base chow hall at the Marine Corps Base Hawaii in Kaneohe Bay, Hawaii December 25, 2012.

WASHINGTON/HONOLULU | Wed Dec 26, 2012 7:30pm EST

WASHINGTON/HONOLULU (Reuters) - Efforts to prevent the U.S. economy from going over a "fiscal cliff" stirred back to life on Wednesday with less than a week to go before potentially disastrous tax hikes and spending cuts kick in at the New Year.

In a sign that there may be a way through deadlock in Congress, Republican House of Representatives Speaker John Boehner urged the Democrat-controlled Senate to act to pull back from the cliff and offered to at least consider any bill the upper chamber produced.

President Barack Obama will try to revive budget crisis talks - which stalled last week - when he returns to Washington on Thursday after cutting short his Christmas holiday in Hawaii.

But the White House and Republicans are still far apart, as hopes for legislation to prevent the economy from tumbling off the fiscal cliff switch to the Senate.

Democrats control a majority in that chamber but still need some support from Republicans across the aisle for a likely attempt to raise taxes on the wealthy.

A senior administration official told reporters traveling with Obama in Hawaii that senior Republican leaders in Congress, Senator Mitch McConnell and Boehner, should step up to head off the looming tax and spending hit.

"It's up to the Senate Minority Leader not to block a vote, and it's up the House Republican leader, the Speaker of the House ... to allow a vote," the official said.

Months of congressional gridlock on how reduce the deficit and rein in the nation's $16 trillion federal debt have begun to affect ordinary Americans.

Shoppers might have spent less this holiday season for fear of looming income tax increases and reports of lackluster retail holiday sales added to the urgency for a deal. U.S. stocks fell on Wednesday, dragged lower by shares of retail companies.

TREASURY BUYING TIME

To avoid defaulting on the national debt if the budget crisis spins out of control, the Treasury Department announced measures essentially designed to buy time to allow Congress to resolve its differences and raise the debt borrowing limit.

Obama flies back from Hawaii overnight and is due in the White House on Thursday morning.

Starbucks Chief Executive Howard Schultz is urging workers in the company's roughly 120 Washington-area coffee shops to write "come together" on customers' cups on Thursday and Friday to tell politicians to end the crisis.

"We're paying attention, we're greatly disappointed in what's going on and we deserve better," Schultz told Reuters.

Boehner and his House Republican leadership team said in a statement that "the Senate must act first."

That puts the ball in the court of the Democrats in the Senate, which is likely to base any legislation on a bill it passed earlier this year to continue tax breaks for households with incomes below $250,000.

A spokesman for Senate Majority Leader Harry Reid issued a strongly worded statement calling on Republicans to "drop their knee-jerk obstruction."

"The Senate bill could pass tomorrow if House Republicans would simply let it come to the floor," the spokesman said.

A Senate bill would likely contain an extension of expiring unemployment benefits for those who have been out of work for extended periods.

With the 435 members scattered throughout the country because the House is in recess, House Republican leaders scheduled a conference call for Thursday with members to possibly discuss bringing the chamber back into session to deal with the fiscal cliff.

The budget fight is not just about taxes, however.

The country faces $109 billion in across-the-board spending cuts starting in January unless a deal is reached to either replace or delay them. Democrats want to switch the spending cuts to tax increases for the most part.

House Republicans have passed a bill to stop the military portion of the spending cuts and place the entire burden on domestic activities, including some social safety net programs.

But the main focus is on how to stop tax hikes on January 1.

"This is the (emergency) scenario that we have long believed would rise in probability the closer we go to December 31, which essentially calls for extending all the rates for those individuals making under $200K and households under $250K and does not address the debt ceiling or the deficit," analyst Chris Krueger of Guggenheim Securities wrote in a research note.

Republican Senator Kay Bailey Hutchison of Texas, who is retiring at year's end, told MSNBC that $250,000 "is too low of a threshold" for raising income taxes.

RAISING TAX THRESHOLD

She said that in conversations she has had with some Senate Democrats, "they are saying maybe more in the $400,000 to $500,000 category."

Obama himself recently offered to raise the threshold to $400,000, before negotiations with Boehner broke off.

Boehner and other Republican leaders said in a statement that if the Senate sends the House new fiscal cliff legislation, "The House will then consider whether to accept the bills ... or to send them back to the Senate with additional amendments.

"The House will take this action on whatever the Senate can pass, but the Senate first must act."

But even if a handful of Senate Republicans support Democrats on a measure to avoid the worst of the fiscal cliff, time is short. When the Senate returns on Thursday it is due to work on a disaster aid bill to help New York and New Jersey recover from Superstorm Sandy and other measures.

All 191 House Democrats might have to team up with at least 26 Republicans to get a majority if the bill included tax hikes on the wealthiest Americans, as Obama is demanding.

Some of those votes could conceivably come from among the 34 Republican members who are either retiring or were defeated in the November elections and no longer have to worry about the political fallout.

An alternative is for Congress to let income taxes go up on everyone as scheduled. Then, during the first week of January, lawmakers would strike a quick deal to reduce them except on people in the highest brackets.

They could also pass a measure putting off the $109 billion in automatic spending cuts that most lawmakers want to avoid.

Once the clock ticks past midnight on December 31, no member of Congress would have to vote for a tax increase on anyone - taxes would have risen automatically - and the only votes would be to decrease tax rates for most Americans back to their 2012 levels.

(Additional reporting by Thomas Ferraro in Washington and Lisa Baertlein in Los Angeles, Writing by Alistair Bell)

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U.S. Senate Majority Leader Harry Reid (D-NV) is shown in this C-Span video footage as he addresses the Senate during an unusual session on Capitol Hill in Washington, December 30, 2012. Hopes rose on Sunday that U.S. lawmakers could reach at least a limited deal to prevent the still-recovering economy from tumbling off a ''fiscal cliff'' at the New Year, sending the country into another recession.

WASHINGTON | Sun Dec 30, 2012 2:27pm EST

WASHINGTON (Reuters) - Senate Majority Leader Harry Reid said on Sunday that Democrats and Republicans still had key differences in talks to avert a looming year-end "fiscal cliff," and he had not been able to make a counteroffer to the latest Republican proposal.

"I've had a number of conversations with the president and at this stage we're not able to make a counteroffer," Reid said on the Senate floor.

He said that as the day wears on, Democrats may be able to make such an offer.

"I think that the Republican leader has shown absolutely good faith. It's just that we're apart on some pretty big issues," Reid added. (Reporting By David Lawder; Editing by David Brunnstrom)

View the original article here

Wed Dec 26, 2012 2:51pm EST

n">(Reuters) - Falling off the "fiscal cliff" is a bad thing, right?

Not necessarily for some state governments that could begin collecting more in estate taxes on wealth left to heirs if the United States goes over the "cliff," allowing sharp tax increases and federal spending cuts to take effect in January.

In an example of federal and state tax law interaction that gets little notice on Capitol Hill, 30 states next year could collect $3 billion more in estate taxes if Congress and President Barack Obama do not act soon, estimated the Urban-Brookings Tax Policy Center, a Washington think tank.

The reason? The federal estate tax would return with a vengeance and so would a federal credit system that shares a portion of it with the 30 states. They had been getting their cut of this tax revenue stream until the early 2000s. That was when the credit system for payment of state estate tax went away due to tax cuts enacted under former President George W. Bush.

With the return of the credit system next year as part of the "cliff," states such as Florida, Colorado and Texas - which have not collected estate tax since 2004 - could resume doing so. California Governor Jerry Brown has already begun to add the anticipated estate tax revenue into his plans, including $45 million of it in his 2012-2013 revised budget.

Brown may or may not be jumping the gun.

CLOUDY CLIFF AHEAD

The outlook on the "fiscal cliff" coming up at year-end is uncertain. Democratic President Barack Obama has said he hopes for a last-minute deal to avert it. That would need to get done soon, with Congress just now coming back from its holiday break.

Chances of an agreement became more remote last week after Republicans in the U.S. House of Representatives fumbled their own legislative attempt to prevent the fiscal jolt that economists say could trigger a recession.

House Speaker John Boehner abruptly adjourned the chamber for the holidays after failing to gather the votes from within his own party to pass legislation he and other Republicans had drafted, after walking out of negotiations with Obama.

Weeks of inconclusive political drama over the "cliff" have focused largely on individual income tax rates and spending on federal programs such Medicare and Social Security, but many tax issues are also involved, including the estate tax.

At the moment, under laws signed a decade ago by Bush, the estate tax is applied to inherited assets at a rate of 35 percent after a $5 million exemption. That means a deceased person can pass on an inheritance of up to $5 million before any tax applies. Inherited wealth passed to a spouse or a federally recognized charity is generally not taxed.

Obama wants to raise the rate to 45 percent after a $3.5 million exemption. Republicans have called for complete repeal of the estate tax, which they call the "death tax," though Boehner earlier this month called for freezing the estate tax at its present level. It was difficult to determine what the Republicans want after last week's events in the House.

STATES STAND TO GAIN

If Congress and Obama do not act by December 31, numerous Bush-era tax laws will expire, including the one on estate taxes. That would mean the estate tax rate will shoot up next year to the pre-Bush levels of 55 percent after a $1 million exemption.

It would also mean that for the first time in years, a portion of that estate tax would go to the states, through the return of the credit system.

Under that old law, estates paying the tax could get a credit against their federal tax bill for state estate tax payments of up to 16 percent of the estate's value.

If the fiscal cliff were allowed to take hold unaltered by Washington, 30 states would again automatically begin getting their share of federal estate taxes. The state laws are generally written so the state estate tax amounts are calculated under a formula based on the amount of the federal credit.

This would help states that have struggled with lower tax revenues since the 2007-2009 financial crisis and resulting recession, according to research by the Pew Center on the States, though painful federal spending cut backs would also hurt the states.

(Editing by Kevin Drawbaugh and Cynthia Osterman)

View the original article here

Women carry shopping bags through Times Square in New York, July 27, 2012.

WASHINGTON | Fri Dec 21, 2012 12:47pm EST

WASHINGTON (Reuters) - The U.S. economy showed surprising signs of resilience in November despite the approach of the so-called fiscal cliff as consumer spending rose by the most in three years and a gauge of business investment jumped.

Consumer spending rose 0.6 percent when adjusted for inflation, while new factory orders for capital goods outside the defense and aerospace sectors - a proxy for business spending plans - jumped 2.7 percent, the Commerce Department said on Friday.

Economists had pinned earlier weakness in investment plans on worries lawmakers and the White House might fail to strike a deal to avoid the brunt of tax hikes and government spending cuts scheduled to begin in January.

They also worried consumers would hold back as the end-of-the-year deadline approached with both parties far apart on how to avoid the potential hit to the economy. But Friday's data suggested both consumers and businesses had mostly shrugged off the cliff, at least in November.

"It appears that the looming fiscal cliff hasn't been nearly as disruptive as we had feared," said Paul Ashworth, an economist at Capital Economics in Toronto.

Still, another report provided ample reason for caution as U.S. consumer sentiment slumped in December, with households apparently rattled by on-going negotiations to lessen the fiscal tightening that could easily trigger a recession next year.

The Thomson Reuters/University of Michigan's final index of consumer sentiment in December tumbled more than expected to 72.9 from 82.7 a month before.

U.S. stocks fell sharply after a Republican proposal for averting the fiscal cliff was abandoned late on Thursday, eroding optimism that a deal could be reached quickly. At the same time, U.S. government debt prices rallied and the dollar gained ground as investors sought a safe haven.

Economists still expect economic growth to cool in the fourth quarter as companies slow the pace at which they have been re-stocking their shelves, but the data on Friday suggested consumers are offsetting some of that drag.

Consumer spending is on track to grow at a 2.2 percent annual rate in the fourth quarter, faster than during the prior three months, said Michael Feroli, an economist at JPMorgan in New York.

Forecasting firm Macroeconomic Advisers raised its forecast for fourth-quarter economic growth by four tenths of a point to a 1.4 percent annual rate. In the third quarter, the economy expanded at a 3.1 percent rate.

"The economy is holding in here at the end of the year despite the concerns about the fiscal cliff," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis.

WORRIES AHEAD

Those concerns are not going away.

In November, many analysts on Wall Street said they expected Washington would largely avert the fiscal cliff, and optimism had grown over the last week that a deal was within reach. Since Wednesday, however, negotiations have fallen into disarray.

If Congress and the White House do not reach a deal in time, taxes will go up for all Americans beginning in January and the government will cut spending on a host of programs. Running off the fiscal cliff would slash the nation's trillion-dollar budget deficit nearly in half in just one year.

The impact would only come gradually, but economists expect it would be enough to knock the country into recession in the first half of the year.

So far, uncertainty over the talks appears to have had only a limited impact on the economy.

New orders for durable goods, items meant to last three years or more, rose a greater-than-expected 0.7 percent in November due to gains in machinery, fabricated metal products, and computer and electronic products. Those increases were offset by a decline in volatile aircraft orders.

The report also showed a rise in shipments, brightening the prospects for fourth-quarter economic growth.

Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the government's measures of gross domestic product, gained 1.8 percent, after rising by a softer 0.6 percent in October.

(Additional reporting by Ellen Freilich and Leah Schnurr in New York; Editing by Andrea Ricci and Tim Ahmann)

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U.S. President Barack Obama hosts a bipartisan meeting with Congressional leaders in the Roosevelt Room of White House to discuss the economy, November 16, 2012. Left of President Obama is Speaker of the House John Boehner.

WASHINGTON | Sun Dec 23, 2012 12:49am EST

WASHINGTON (Reuters) - The "fiscal cliff" deadline is days away and the U.S. Congress and President Barack Obama have left town for Christmas.

But even if they were still here, it wouldn't have mattered, according to Steny Hoyer, the second-ranking Democrat in the House of Representatives. He says they were going nowhere to resolving the disagreement over how to fix the nation's fiscal problems.

Last month's dreams of a "grand bargain" of tax hikes and spending cuts seem long gone. They had been reduced to more modest bargains in mid-December, and as 2013 approaches, are on the verge of relegation to a "stop-gap measure," at best the sort of temporary fix that Congress undertook in 2011.

A stop-gap that puts everything off for a while but resolves nothing is now the most promising alternative, if there is to be one, to the across-the-board tax hikes and spending cuts described as a "fiscal cliff" because they threaten to send the U.S. economy plunging into another recession.

It is also the way fiscal showdowns have ended in Washington in recent years.

Such a fix, at best, would delay the spending cuts and tax hikes further into 2013 as well as work to address in a long-term way a government budget that has generated deficits exceeding $1 trillion in each of the last four years. Even worse, it would set up a huge fight in January and February over raising the U.S. debt ceiling, which controls the amount of money the federal government can borrow.

Dysfunction in Washington was specifically cited as one of the reasons rating agency Standard & Poor's cut the U.S. debt rating to AA-plus after a battle over the debt ceiling in 2011. That alone - not to mention going over the cliff - could lead to another rating cut.

At worst, the new year could start with a full-fledged jump off the 'cliff,' with an understanding, communicated to financial markets, that Congress and the White House would come back and try again for a solution.

Given the apparent deadlock, some congressional aides this week said that Washington needed to begin telegraphing to Wall Street that markets should not panic if a "fiscal cliff" deal is not struck in December.

The goal, one aide said on condition of anonymity, is to avoid starting 2013 with a steep stock market drop like the one the U.S. suffered in 2008, when the country's financial industry was falling apart and Congress was divided over what to do.

On Friday, Obama acknowledged that only small steps might be possible with so little time remaining.

Those, the Democratic president said, would consist of extending benefits for the long-term unemployed and keeping income tax rates low for 98 percent of Americans - meaning raising taxes on households with net incomes above $250,000 a year but not for those earning less.

He held out the possibility of something "comprehensive," as he put it, but it had a hollow ring at the close of a work week that saw House Speaker John Boehner step back from negotiations and pursue a partisan plan that even some of his fellow Republicans could not stomach.

MARKET PRESSURE

The steps that Obama outlined were immediately rejected by Republicans, who have given ground on their previous steadfast opposition to any tax hikes but are still demanding that the White House agree to more substantial spending cuts.

"The president has failed to offer any solution that passes the test of balance," declared Boehner spokesman Brendan Buck, minutes after the end of Obama's statement on Friday.

On Saturday, a spokesman for Senate Republican leader Mitch McConnell was similarly dismissive, noting Obama's call had neither bipartisan support nor spending cuts to ride along with tax increases.

McConnell, on Friday, suggested bringing up a House-passed bill that extends current tax rates for all Americans, including the top earners, and then pushes for comprehensive tax reform next year that theoretically could raise new revenues to help cut deficits.

But Obama has promised repeatedly to veto any extension of the expiring Bush-era tax cuts that fail to hike rates for the wealthy.

And Democrats, who control the Senate, have dismissed the McConnell idea, arguing that Obama ran his successful 2012 re-election campaign on a promise of forcing the wealthy to bear more of the burden of deficit reduction.

Democratic aides in Congress think their own bill implementing Obama's $250,000 income threshold, which passed the 100-member Senate in July with 51 votes, could breeze through this month, or next year after the "fiscal cliff" is breached.

The prospect of a breach is being discussed far more seriously now, and not just as a bluff or to set up the other side for blame.

"I think we're going to go over the cliff," said Republican Representative Patrick Tiberi of Ohio. "I don't see something getting done."

In an MSNBC interview Friday, Hoyer, a 31-year veteran of Congress from Maryland, said it wouldn't matter if everyone was in Washington instead of on holiday.

"Frankly, we've been in town for four weeks and members haven`t been doing much," he said, calling it "one of the least productive times that I've been in Congress."

Even Obama speaks of "a mismatch" between how people are thinking about the looming tax hikes and spending cuts "outside of this town and how folks are operating here. And we've just got to get that aligned," he said in his statement.

ITG Investment Research Chief Economist Steve Blitz on Saturday said sliding the "fiscal cliff" negotiations into the new year was not a huge deal. "I think markets will pressure for a deal in January," he said.

The "pressure" could be in the form of a significant stock market drop, which would hit workers' retirement plans, threaten to deter consumer and business spending, and possibly rattle other countries' economies at a time when the global economy is far from robust.

(Additional reporting by Rachelle Younglai; Editing by Martin Howell and Paul Simao)

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1 of 2. U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

WASHINGTON | Sun Dec 23, 2012 5:33pm EST

WASHINGTON (Reuters) - Some lawmakers voiced concern on Sunday that the country would go over "the fiscal cliff" in nine days, triggering harsh spending cuts and tax hikes, and some Republicans charged that was President Barack Obama's goal.

"It's the first time that I feel it's more likely that we will go over the cliff than not," Senator Joe Lieberman, an independent from Connecticut, said on CNN's "State of the Union."

"If we allow that to happen it will be the most colossal consequential act of congressional irresponsibility in a long time, maybe ever in American history."

"It looks like to me that obviously this is going to drag on into next year, which is going to hurt our economy," Republican Senator Bob Corker of Tennessee said on CBS "Capitol Gains."

The Democratic president and Republican House of Representatives Speaker John Boehner, the two key negotiators, are not talking and are out of town for the Christmas holidays. Congress is in recess, and will have only a few days next week to act before January 1.

On the Sunday TV talk shows, no one signaled a change of position that could form the basis for a short-term fix, despite a suggestion from Obama on Friday that he would favor one.

The focus was shifting instead to the days following January 1 when the lowered tax rates dating back to President George W. Bush's administration will have expired, presenting Congress with a redefined and more welcome task that involves only cutting taxes, not raising them.

"I believe we are," going over the cliff, Republican Senator John Barrasso of Wyoming said on Fox News Sunday. "I think the president is eager to go over the cliff for political purposes. I think he sees a political victory at the bottom of the cliff."

Some Republicans have said Obama would welcome the fiscal cliff's tax increases and defense cuts, as well as the chance to blame Republicans for rejecting deal. Obama has rejected that assertion.

Democrats have charged that Boehner has his own self-interested reasons for avoiding a deal before January 3, when the House elected on November 6, is sworn in and casts votes for a new speaker.

Democratic Senator Charles Schumer of New York said on NBC's "Meet the Press" that Boehner has been reluctant to reach across the political aisle for fear it could cost him the speakership when he runs for re-election. "I know he's worried," said Schumer.

Boehner, who so far has no serious challenger for the job of speaker, has said that he has no such concerns.

Such finger pointing has been under way since Congress returned after the election, but it has gained intensity in the past few days, with the heightened prospect of plunging off the cliff.

Congress started the clock ticking in August of 2011 on the cliff. The threat of about $600 billion of spending cuts and tax increases was intended to shock the Democratic-led White House and Senate and the Republican-led House into bridging their many differences to approve a plan to bring tax relief to most Americans and curb runaway federal spending.

Economists say the harsh tax increases and budget cuts from the fiscal cliff could thrust the world's largest economy back into a recession, unless Congress acts quickly to ease the economic blow.

MARKETS COULD TUMBLE

The most immediate impact could come in financial markets, which have been relatively calm in recent weeks as Republicans and Democrats bickered, but could tumble without prospects for a deal.

Markets will be open for a half-day on Christmas Eve, when Congress will not be in session, and will be closed on Tuesday for Christmas.

Wall Street will resume regular stock trading on Wednesday, but volume is expected to be light throughout the week with scores of market participants away on a holiday break.

If Congress fails to reach any agreement, income tax rates will go up on just about everyone on January 1. Unemployment benefits, which Democrats had hoped to extend as part of a deal, will expire for many as well.

In the first week of January, Congress could scramble and get a quick deal on taxes and the $109 billion in automatic spending cuts for 2013 that most lawmakers want to avoid.

Once tax rates go up on January 1, it could be easier to keep those higher rates on wealthier taxpayers while reducing them for middle- and lower-income taxpayers. Lawmakers would not have to cast votes to raise taxes.

Some lawmakers expressed guarded hope that a short-term deal on deficit reduction could be reached in the next week or so, with a longer, more permanent deal hammered out next year.

But a short-term deal would need bipartisan support, as Obama has said he would veto a bill that does not raise taxes on the wealthiest Americans.

Democratic Senator Kent Conrad, chairman of the Budget Committee, said Obama and Boehner are not that far apart and that both sides should keep pushing for a long-term big deal.

"I would hope we would have one last attempt here to do what everyone knows needs to be done, which is the larger plan that really does stabilize the debt and get us moving in the right direction," Conrad of North Dakota told Fox News Sunday.

But most Republicans are now looking past January 1 to what they consider their next best chance of leveraging Obama for more cuts in the Federal budget - a fight over the debt ceiling expected in late January or early February. At that time, the administration will need Congress' authorization to raise the limit on the amount of money the government can borrow.

"That's where the real chance for change occurs, at the debt-ceiling debate," Republican Senator Lindsey Graham of South Carolina said on "Meet the Press."

(Reporting by Thomas Ferraro and Richard Cowan; Editing by Fred Barbash and Vicki Allen)

View the original article here

1 of 2. U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

WASHINGTON | Sun Dec 23, 2012 5:33pm EST

WASHINGTON (Reuters) - Some lawmakers voiced concern on Sunday that the country would go over "the fiscal cliff" in nine days, triggering harsh spending cuts and tax hikes, and some Republicans charged that was President Barack Obama's goal.

"It's the first time that I feel it's more likely that we will go over the cliff than not," Senator Joe Lieberman, an independent from Connecticut, said on CNN's "State of the Union."

"If we allow that to happen it will be the most colossal consequential act of congressional irresponsibility in a long time, maybe ever in American history."

"It looks like to me that obviously this is going to drag on into next year, which is going to hurt our economy," Republican Senator Bob Corker of Tennessee said on CBS "Capitol Gains."

The Democratic president and Republican House of Representatives Speaker John Boehner, the two key negotiators, are not talking and are out of town for the Christmas holidays. Congress is in recess, and will have only a few days next week to act before January 1.

On the Sunday TV talk shows, no one signaled a change of position that could form the basis for a short-term fix, despite a suggestion from Obama on Friday that he would favor one.

The focus was shifting instead to the days following January 1 when the lowered tax rates dating back to President George W. Bush's administration will have expired, presenting Congress with a redefined and more welcome task that involves only cutting taxes, not raising them.

"I believe we are," going over the cliff, Republican Senator John Barrasso of Wyoming said on Fox News Sunday. "I think the president is eager to go over the cliff for political purposes. I think he sees a political victory at the bottom of the cliff."

Some Republicans have said Obama would welcome the fiscal cliff's tax increases and defense cuts, as well as the chance to blame Republicans for rejecting deal. Obama has rejected that assertion.

Democrats have charged that Boehner has his own self-interested reasons for avoiding a deal before January 3, when the House elected on November 6, is sworn in and casts votes for a new speaker.

Democratic Senator Charles Schumer of New York said on NBC's "Meet the Press" that Boehner has been reluctant to reach across the political aisle for fear it could cost him the speakership when he runs for re-election. "I know he's worried," said Schumer.

Boehner, who so far has no serious challenger for the job of speaker, has said that he has no such concerns.

Such finger pointing has been under way since Congress returned after the election, but it has gained intensity in the past few days, with the heightened prospect of plunging off the cliff.

Congress started the clock ticking in August of 2011 on the cliff. The threat of about $600 billion of spending cuts and tax increases was intended to shock the Democratic-led White House and Senate and the Republican-led House into bridging their many differences to approve a plan to bring tax relief to most Americans and curb runaway federal spending.

Economists say the harsh tax increases and budget cuts from the fiscal cliff could thrust the world's largest economy back into a recession, unless Congress acts quickly to ease the economic blow.

MARKETS COULD TUMBLE

The most immediate impact could come in financial markets, which have been relatively calm in recent weeks as Republicans and Democrats bickered, but could tumble without prospects for a deal.

Markets will be open for a half-day on Christmas Eve, when Congress will not be in session, and will be closed on Tuesday for Christmas.

Wall Street will resume regular stock trading on Wednesday, but volume is expected to be light throughout the week with scores of market participants away on a holiday break.

If Congress fails to reach any agreement, income tax rates will go up on just about everyone on January 1. Unemployment benefits, which Democrats had hoped to extend as part of a deal, will expire for many as well.

In the first week of January, Congress could scramble and get a quick deal on taxes and the $109 billion in automatic spending cuts for 2013 that most lawmakers want to avoid.

Once tax rates go up on January 1, it could be easier to keep those higher rates on wealthier taxpayers while reducing them for middle- and lower-income taxpayers. Lawmakers would not have to cast votes to raise taxes.

Some lawmakers expressed guarded hope that a short-term deal on deficit reduction could be reached in the next week or so, with a longer, more permanent deal hammered out next year.

But a short-term deal would need bipartisan support, as Obama has said he would veto a bill that does not raise taxes on the wealthiest Americans.

Democratic Senator Kent Conrad, chairman of the Budget Committee, said Obama and Boehner are not that far apart and that both sides should keep pushing for a long-term big deal.

"I would hope we would have one last attempt here to do what everyone knows needs to be done, which is the larger plan that really does stabilize the debt and get us moving in the right direction," Conrad of North Dakota told Fox News Sunday.

But most Republicans are now looking past January 1 to what they consider their next best chance of leveraging Obama for more cuts in the Federal budget - a fight over the debt ceiling expected in late January or early February. At that time, the administration will need Congress' authorization to raise the limit on the amount of money the government can borrow.

"That's where the real chance for change occurs, at the debt-ceiling debate," Republican Senator Lindsey Graham of South Carolina said on "Meet the Press."

(Reporting by Thomas Ferraro and Richard Cowan; Editing by Fred Barbash and Vicki Allen)

View the original article here

U.S. House Speaker John Boehner (R-OH) arrives to speak to the media on the ''fiscal cliff'' on Capitol Hill in Washington, December 21, 2012.

WASHINGTON | Sun Dec 23, 2012 10:01am EST

WASHINGTON (Reuters) - So what now?

The U.S. House of Representatives' rejection of a bill to raise taxes on just 0.18 percent of Americans - those making more than $1 million a year - has raised questions about the Republican-led chamber's ability to approve any plan to avert the looming "fiscal cliff."

Unless President Barack Obama and the U.S. Congress can forge a deal during the Christmas and New Year's holiday season, the largest economy in the world could be thrust back into a recession because of the steep tax increases and spending cuts that are due to begin in January.

The threat of across-the-board government spending cuts and tax increases - about $600 billion worth - was intended to shock the Democratic-led White House and Senate and the Republican-led House into moving past their many differences to approve a plan that would bring tax relief to most Americans and curb runaway federal spending.

For weeks, Obama and House Speaker John Boehner, the top Republican in Congress, have struggled to find a compromise.

But after a glimmer of hope that a deal was close early this week, Boehner - apparently under pressure from anti-tax House Republicans aligned with the conservative Tea Party movement - pressed the "pause" button on negotiations. He then tried to push a backup plan through the House late on Thursday, only to see his fellow Republicans kill it.

Where do Obama and Congress go from here? Here are some possible scenarios.

* Obama and Boehner go back into their secret negotiations.

Before Boehner started touting his failed "Plan B" to boost taxes on those who make more than $1 million, he and Obama were moving closer together on a plan to raise taxes on certain high-income Americans and cut spending. They could pick up where they left off and quickly cut a deal to bridge the gap.

But a compromise with possibly $1 trillion in new taxes and $1 trillion in new, long-term spending cuts could be a tough sell for both Republicans and Democrats in Congress.

Boehner would have to persuade enough Republicans on the idea of tax increases. Obama, meanwhile, would have to get Democrats in Congress to back cuts to some social safety net programs such as Social Security pensions and Medicare and Medicaid health insurance for the elderly and poor. House Republicans appear to be the tougher sell.

* A huge drop in the stock market sends a loud message to Washington politicians to stop arguing and cut a quick but meaningful deal.

That is what happened in late September 2008, after Congress rejected a massive financial bailout package despite warnings by Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson of an economic collapse if the bill failed.

The Dow Jones Industrial Average plunged more than 700 points and Congress quickly reversed course, approving the $700 billion Troubled Asset Relief Program just days later.

The "fiscal cliff" may not be as dramatic a situation, but the tax increases and cuts in federal spending could deal a stiff blow to the economy.

* No deal happens in the dwindling days of 2012 and the U.S. government jumps off the fiscal cliff - at least temporarily.

On January 1, income taxes would go up on just about everyone. During the first week of January, Congress could scramble and get a quick deal on taxes and the $109 billion in automatic spending cuts that most lawmakers want to avoid.

Why could they reach a deal in January if they fail in December?

The reason would be that once taxes go up, it would be easier to allow a few of those increases to remain in place - mostly on the wealthy - and repeal those that would hit middle- and lower-income taxpayers.

Such a scenario would mean that no member of Congress technically would have to vote for a tax increase on anyone - taxes would have risen automatically - and the only votes would be to decrease tax rates for most Americans back to their 2012 levels.

* No deal occurs for another six weeks or so.

If Congress does not raise the nation's debt limit, by mid-February the Treasury Department likely would exhaust its ability to borrow. That would put the nation at risk of defaulting on its debt.

Republicans have withheld their approval of the debt-limit increase as leverage to try to get the kind of "fiscal cliff" solution they want: Fewer increases in spending and taxes, and more cuts to Social Security, Medicare and Medicaid.

This is the strategy they employed in mid-2011 during the last fight over the debt limit, which is about $16.4 trillion.

Republicans wrung spending cuts out of Democrats in return for new borrowing authority, but paid a political price. Global financial markets were rocked by the long uncertainty brought on by the standoff in Congress, one ratings agency downgraded U.S. credit standing and Republicans saw their public approval ratings sink.

* Boehner decides on a gutsy move: Call a House vote on a bill that would raise tax rates for families with net annual incomes above $250,000, exactly what Obama has sought.

The plan could pass the House with strong Democratic support and some Republican votes. As soon as it passed, the House likely would leave town for the rest of the year without addressing other Obama priorities such as increasing the government's debt limit.

* A partial deal is struck at any point.

Congress could pass a plan that would put off most of the income tax increases that are due in January, or extend some other expiring tax breaks - namely one to prevent middle-class taxpayers from being subject to higher tax rates aimed at the wealthy under the alternative minimum tax.

* Stock markets do not tank and Washington politicians conclude that the "fiscal cliff" is not such a bad thing.

Under this scenario, Congress and the White House could continue sniping at each other throughout 2013 and 2014 as they try to revamp tax policy and impose long-term spending cuts.

(Editing by David Lindsey and Will Dunham)

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U.S. President Barack Obama hosts a bipartisan meeting with Congressional leaders in the Roosevelt Room of White House to discuss the economy, November 16, 2012. Left of President Obama is Speaker of the House John Boehner.

WASHINGTON | Sun Dec 23, 2012 12:49am EST

WASHINGTON (Reuters) - The "fiscal cliff" deadline is days away and the U.S. Congress and President Barack Obama have left town for Christmas.

But even if they were still here, it wouldn't have mattered, according to Steny Hoyer, the second-ranking Democrat in the House of Representatives. He says they were going nowhere to resolving the disagreement over how to fix the nation's fiscal problems.

Last month's dreams of a "grand bargain" of tax hikes and spending cuts seem long gone. They had been reduced to more modest bargains in mid-December, and as 2013 approaches, are on the verge of relegation to a "stop-gap measure," at best the sort of temporary fix that Congress undertook in 2011.

A stop-gap that puts everything off for a while but resolves nothing is now the most promising alternative, if there is to be one, to the across-the-board tax hikes and spending cuts described as a "fiscal cliff" because they threaten to send the U.S. economy plunging into another recession.

It is also the way fiscal showdowns have ended in Washington in recent years.

Such a fix, at best, would delay the spending cuts and tax hikes further into 2013 as well as work to address in a long-term way a government budget that has generated deficits exceeding $1 trillion in each of the last four years. Even worse, it would set up a huge fight in January and February over raising the U.S. debt ceiling, which controls the amount of money the federal government can borrow.

Dysfunction in Washington was specifically cited as one of the reasons rating agency Standard & Poor's cut the U.S. debt rating to AA-plus after a battle over the debt ceiling in 2011. That alone - not to mention going over the cliff - could lead to another rating cut.

At worst, the new year could start with a full-fledged jump off the 'cliff,' with an understanding, communicated to financial markets, that Congress and the White House would come back and try again for a solution.

Given the apparent deadlock, some congressional aides this week said that Washington needed to begin telegraphing to Wall Street that markets should not panic if a "fiscal cliff" deal is not struck in December.

The goal, one aide said on condition of anonymity, is to avoid starting 2013 with a steep stock market drop like the one the U.S. suffered in 2008, when the country's financial industry was falling apart and Congress was divided over what to do.

On Friday, Obama acknowledged that only small steps might be possible with so little time remaining.

Those, the Democratic president said, would consist of extending benefits for the long-term unemployed and keeping income tax rates low for 98 percent of Americans - meaning raising taxes on households with net incomes above $250,000 a year but not for those earning less.

He held out the possibility of something "comprehensive," as he put it, but it had a hollow ring at the close of a work week that saw House Speaker John Boehner step back from negotiations and pursue a partisan plan that even some of his fellow Republicans could not stomach.

MARKET PRESSURE

The steps that Obama outlined were immediately rejected by Republicans, who have given ground on their previous steadfast opposition to any tax hikes but are still demanding that the White House agree to more substantial spending cuts.

"The president has failed to offer any solution that passes the test of balance," declared Boehner spokesman Brendan Buck, minutes after the end of Obama's statement on Friday.

On Saturday, a spokesman for Senate Republican leader Mitch McConnell was similarly dismissive, noting Obama's call had neither bipartisan support nor spending cuts to ride along with tax increases.

McConnell, on Friday, suggested bringing up a House-passed bill that extends current tax rates for all Americans, including the top earners, and then pushes for comprehensive tax reform next year that theoretically could raise new revenues to help cut deficits.

But Obama has promised repeatedly to veto any extension of the expiring Bush-era tax cuts that fail to hike rates for the wealthy.

And Democrats, who control the Senate, have dismissed the McConnell idea, arguing that Obama ran his successful 2012 re-election campaign on a promise of forcing the wealthy to bear more of the burden of deficit reduction.

Democratic aides in Congress think their own bill implementing Obama's $250,000 income threshold, which passed the 100-member Senate in July with 51 votes, could breeze through this month, or next year after the "fiscal cliff" is breached.

The prospect of a breach is being discussed far more seriously now, and not just as a bluff or to set up the other side for blame.

"I think we're going to go over the cliff," said Republican Representative Patrick Tiberi of Ohio. "I don't see something getting done."

In an MSNBC interview Friday, Hoyer, a 31-year veteran of Congress from Maryland, said it wouldn't matter if everyone was in Washington instead of on holiday.

"Frankly, we've been in town for four weeks and members haven`t been doing much," he said, calling it "one of the least productive times that I've been in Congress."

Even Obama speaks of "a mismatch" between how people are thinking about the looming tax hikes and spending cuts "outside of this town and how folks are operating here. And we've just got to get that aligned," he said in his statement.

ITG Investment Research Chief Economist Steve Blitz on Saturday said sliding the "fiscal cliff" negotiations into the new year was not a huge deal. "I think markets will pressure for a deal in January," he said.

The "pressure" could be in the form of a significant stock market drop, which would hit workers' retirement plans, threaten to deter consumer and business spending, and possibly rattle other countries' economies at a time when the global economy is far from robust.

(Additional reporting by Rachelle Younglai; Editing by Martin Howell and Paul Simao)

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NEW YORK | Sat Dec 22, 2012 1:09am EST

NEW YORK (Reuters) - Fears about imminent tax hikes and cuts to government spending are taking a toll on U.S. shoppers and could deprive retailers of a strong finish to the 2012 holiday shopping season.

The acrimonious debate in Washington over how to avoid the so-called fiscal cliff has cast a pall over shopper sentiment, retail experts say, as consumers head to the malls on the last Saturday before Christmas - typically one of the busiest shopping days of the year.

Talks to avoid the fiscal cliff stalled on Thursday when Republican lawmakers rejected House Speaker John Boehner's proposal aimed at winning concessions from President Barack Obama.

"The longer Congress delays making a decision on the fiscal cliff and the more uncertainty people feel, as we go toward Christmas, they would start pulling back on their spending," said Ron Friedman, retail practice leader at consulting firm Marcum LLP. "I don't think we're going to get a great pickup in the last few days here."

About 17 percent of the 1,514 Americans who participated in a Reuters/Ipsos poll conducted December 17-20 said the impending "fiscal cliff" was making them spend less this season.

U.S. consumer sentiment also plummeted in December as Americans were unnerved by ongoing negotiations, data showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment tumbled to 72.9 from 82.7 in November, worse than forecasts for 74.7. It was the lowest level since July.

"What could have been a merry Christmas is going to turn to a ho-hum Christmas, and we can thank our, you know, politicians for getting in the middle of it all," NPD analyst Marshal Cohen said. "It is like this great unknown puts a big damper on the consumer feeling confident to go out and spend more."

More than 60 percent of U.S. consumers have already finished more than three-quarters of their holiday shopping, according to a Reuters/Ipsos poll released on Thursday. This means retailers will have to offer deeper discounts to force Americans to open their wallets in the last lap of the holiday season.

The holiday quarter can account for about 30 percent of annual sales and half of profit for many chains, and experts including Cohen and Friedman see retailers pulling out all the stops this weekend and the week ahead to woo last-minute shoppers.

"The only way retailers now are going to be able to get a boost is by creating their own stimulus package, and that stimulus package is going to be markdowns," Cohen said.

Earlier this week, research firm ShopperTrak lowered its sales forecast for November and December and now expects sales to be up 2.5 percent, rather than up 3.3 percent.

Many retailers reported record traffic at the beginning of the season, but several, including Macy's Inc and Saks Inc, lost a lot of business because of Hurricane Sandy.

Earlier this week, Redbook Research said chain-store same-store sales rose 2.2 percent so far in December, suggesting shoppers are indeed cooling their heels. Sales for the November-December holiday season look set to rise 4.1 percent to $586.1 billion this year after a 5.6 percent increase in 2011, according to a National Retail Federation forecast.

"Retailers are going to be pretty challenged this year in trying to get beyond all this," Cohen said, referring to a string of events this holiday season that have weighed on U.S. shoppers including the hurricane, gridlock in Washington and a recent shooting at an elementary school in Connecticut.

NRF sees 2013 retail sales rising about 2 to 2.5 percent if the fiscal cliff is averted. If not, sales would be essentially flat for the year, the trade group estimated in a study with Macroeconomic Advisers.

(Editing by Matthew Lewis)

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U.S. House Speaker John Boehner (R-OH) speaks to the media on a ''fiscal cliff'' on Capitol Hill in Washington, December 20, 2012.

WASHINGTON | Fri Dec 21, 2012 7:38am EST

WASHINGTON (Reuters) - Now that House Speaker John Boehner's "Plan B" for addressing the "fiscal cliff" has crashed and burned, the top U.S. Republican appears to have two remaining options - wash his hands of the entire matter or negotiate a compromise with Democrats that could abandon scores of his fellow Republicans.

The Republican rank and file and Democrats may face an equally stark choice: work together for a change, or plunge together off the cliff.

Boehner tried to ram a "fallback" plan through the House on Thursday - a relatively tiny tax increase on millionaires and billionaires - and failed. His rambunctious Republicans, who see opposition to all tax hikes as a matter of bedrock principle and of political survival, refused to go along.

President Barack Obama and his Democrats who control the Senate take the opposite view - tax hikes on the wealthy are a condition for their support of a fiscal cliff bill. If there is to be a resolution it will largely depend on an improbable scenario - Democrats in the House teaming up with less militant Republicans to back away from the fiscal cliff.

Compromise has been out of style in recent years, and many think it could require some prodding from the markets.

"At this point, I only see one route to avoiding the cliff, a replay of the TARP debacle in 2008," said George Washington University's Sarah Binder, an expert on Congress. In September 2008, the House defeated the bank bailout bill and the market collapsed, prompting a terrified lawmakers to reconsider and pass it.

"In this case, a harsh market and public reaction would be needed to force the hand of the speaker to negotiate a deal that can pass with Democratic votes," she said.

"If the GOP takes a beating in the headlines and the market tanks, I suspect a good number of rank-and-file GOP will demand that the speaker go back to the table. But absent whiplash from the markets and voters, I suspect it's over the cliff we go."

For the time being - or at least the 11 days until the automatic tax hikes and spending cuts are triggered - the House is in disarray and no deal to avert the fiscal cliff is in sight.

While the House in recess for a Christmas break that is likely to last at least until December 27, Boehner must decide whether to move any further in Obama's direction and agree to tax increases much higher than his own proposal that so angered his fellow Republicans on Thursday.

The Ohio Republican also might have to settle for fewer long-term spending cuts than he had hoped for.

WALK ON BY

Boehner's only other apparent option - one that he hinted at late on Thursday following the collapse of his bill - would be to walk away and leave the problem on Democrats' doorstep.

"Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff," Boehner said in a statement referring to Senate Majority Leader Harry Reid.

But in a closed-door session before that statement, Republican lawmakers said Boehner told them that he would at least try to work out something with Obama.

Either way, Boehner faces the possibility of having to battle not only Democrats for the next two years, but also his own membership on major bills.

"We have people (Republican lawmakers) who felt like they had to stand on the principle ... they couldn't vote for anything (that raised any taxes). I don't quite understand it," lamented Representative Buck McKeon, the powerful chairman of the House Armed Services Committee, who oversaw passage of a $633 billion defense spending bill for 2013.

"If you don't have the votes, you can't move forward," McKeon said of the Plan B fiscal cliff bill.

Representative Steven LaTourette, a moderate Republican who is retiring at year's end, told reporters that Thursday's legislative defeat - and public relations failure - will not stop Boehner from being re-elected House Speaker on January 3. "Name one member who opposes him," LaTourette challenged reporters.

Firing Boehner, LaTourette said, would be "like saying the superintendent of the insane asylum should be discharged because he couldn't control the crazy people."

Nonetheless, two years into his stint as Speaker, Boehner still has not found the right formula for corralling his Republican majority, especially the Tea Party conservatives whose victories in 2010 helped Republicans wrest control of the House. However, he has taken steps in recent weeks to punish a handful of uncooperative Republicans.

Since unveiling his plan on Tuesday, several conservative groups, including the Heritage Foundation, waged a spirited effort to kill the measure.

Those groups, LaTourette said, had been "making their phone calls, and they're bombing people" with pressure to vote against the bill. That, he added, "makes people nervous" about primary election challengers being recruited in 2014 by outside groups to defeat Republican lawmakers who vote for any tax increase.

"I doubt his speakership is in trouble," said American Enterprise Institute scholar Norm Ornstein, "The big question is whether, and when, he is willing to bring up a bill that will require more Democrats than Republicans to pass."

(Reporting By Richard Cowan. Editing by Fred Barbash)

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