"if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013. After next year, by the agency’s estimates, economic growth will pick up, and the labor market will strengthen, returning output to its potential level (reflecting a high rate of use of labor and capital) and shrinking the unemployment rate to 5.5 percent by 2018."
So will the Republicans give in to the Democrats' plan to raise tax rates on the top 2% of income earners? Last week, the S&P 500 rallied on the belief that the U.S. will avert the fiscal cliff, but any kind of failed negotiation would send the market back down, in my opinion. But during the Federal Reserve's FOMC meeting on October 23-24, the minutes release said FOMC participants were thinking about QE4 when Operation Twist ends at the end of 2012. They could decide this at their next meeting on December 11-12. The minutes said,
"a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market."
But to counter that, Fed Chairman Ben Bernanke recently said that the Fed didn't have the tools to offset fiscal tightening. Hmm, so pretty much the upside and downside market catalysts are already known regarding the fiscal cliff, but what if there is a natural recession in the cards for 2013? EPS deflation? Here is all the fiscal drama going on.
Video #1: Treasury Secretary Tim Geithner on CNN's State of the Union
"There is not going to be an agreement without rates going up"
Video #1.5: Tim Geithner on Fox News Sunday (see Boehner's interview below)
"No I can't promise that [we won't go over the fiscal cliff]. That's a decision that lies in the hands of the Republicans that are now opposing increases in tax rates."
Video #2: Senator Lindsey Graham on CBS News
"I think we are going over the cliff."
"I would just say this, that my side knows we lost the election, and we're willing to put revenue on the table that will get some political heat from people like me. That is movement in a positive way. Republicans should do revenue, we are willing to do it in a smart way..."
Video #3: House Speaker John Boehner on Fox News Sunday (on the fiscal cliff and debt ceiling)
"Right now, I would say we are nowhere. Period, we are nowhere. We've put a serious offer on the table by putting revenues up there to try to get this question resolved. But the White House has responded with virtually nothing. They've actually asked for more revenue than they've been asking for the whole entire time."
"I've made it clear to the President, that every time we get to the debt limit, we need to cut some reforms that are greater than the increase in the debt limit."