Economy Dec 12, 2012
New York: There's largely been radio silence from both President Barack Obama and Republican House Speaker John Boehner since they held private talks on Sunday to try and talk their way down from the fiscal cliff. It's a departure from the acrimonious rhetoric coming from both sides. And the markets read that as a sign that a breakthrough is about to happen.
The stock market sprang back to life on Tuesday with the Dow Jones industrial average closing up 79.02 points, or 0.60 percent, at 13,248.90.
The mood has been buoyed by a report in The Wall Street Journal that budget negotiations between the White House and Boehner have made steady progress in recent days.
Addressing the US House of Representatives on Tuesday, Boehner said he was "hopeful" they would avoid the so-called fiscal cliff that arrives at midnight December 31 - when Bush-era tax cuts are set to expire and automatic spending cuts are set to go into effect.
"I'm an optimist. I'm hopeful we can reach an agreement," Boehner said on the House floor.
Stock markets stayed higher even after Boehner said midday Tuesday that President Obama is slow-walking talks to avoid the fiscal cliff, and hasn't outlined spending cuts he's willing to support as part of a compromise.
While Boehner demanded more specific spending cuts from Obama, White House spokesman Jay Carney said the administration had submitted extensive proposals to reduce spending but Republicans had not offered "specifics on increasing revenues."
Senate Majority Leader Harry Reid said on Tuesday that it would be "extremely difficult" to pass legislation to address the fiscal cliff before Christmas, but added there's still a chance it can be done.
Obama and Boehner have exchanged opening proposals aimed at cutting deficits by more than $4 trillion over the next 10 years, but they differ on how to get there.
President Obama's proposal
Obama's plan calls for a $1.6 trillion tax increase over 10 years, $50 billion in new spending in 2013, and a change that would give the White House new power to raise the federal debt limit. Obama and Democrats demand that tax rates rise for the wealthiest 2 percent of Americans.
House Republican proposal
Republicans want existing lower rates continued for all brackets and prefer to raise more revenue by eliminating tax loopholes and reducing deductions. Earlier this month, Republicans led by Boehner offered their own proposal, delivering an offer that includes $800 billion in increased tax revenue but doesn't raise income-tax rates for top earners.
Republicans also want deeper spending cuts than those sought by Obama and fellow Democrats, particularly on social entitlement programs like the government-funded Medicare and Medicaid healthcare plans.
Frequently discussed compromise scenario
Most investors expect the White House and Republicans to have the good sense to avoid going over the fiscal cliff. Economists have already warned that if the Bush-era tax cuts expire it could push the soft US economy back into recession.
Analysts say a deal could materialize at the eleventh hour on Capitol Hill with Democrats getting the higher rates on the top earners in exchange for significant concessions to the Republicans on reducing costs in government-funded social entitlement programs.
Meanwhile, Federal Reserve officials started a two-day meeting on Tuesday, with Wall Street expecting central bankers to opt for more bond purchases when Operation Twist expires this year.
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