Obama and Boehner Meet On Sunday Behind Closed Doors

Washington D.C.

In an unexpected move on Sunday President Obama and House Speaker John Boehner (R-Ohio) met behind closed doors in Washington, marking the end of a testy week in Washington D.C. over how to handle the “fiscal cliff” which still hangs in the balance only 3 weeks away. 

White House spokesman Josh Earnest and Senator Boehner spokesman Brendan Buck issued similar statements about the talks.

“This afternoon, the president and Speaker Boehner met at the White House to discuss efforts to resolve the fiscal cliff. We’re not reading out details of the conversation, but the lines of communication remain open.”

President Obama and Speaker Boehner have not held talks since mid-2011 during the debt ceiling debacle, when both parties unsuccessfully sought a compromise over taxes and spending.

President Barack Obama will travel to Detroit, Michigan on Monday to talk about the economy and middle-class families as he seeks to gain more support for his budget proposals that extend tax cuts on the middle class.

Christine Lagarde, the managing director of the IMF, recently spoke to CNN’s Candy Crowley on “State of the Union” and said that “If the U.S. economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero,” she told CNN.

“It would be much better to actually have a more comprehensive approach and to deal with all the issues” Lagarde said.

If no fiscal cliff compromise is reached on Capitol Hill before January 1st, $600 billion in automatic tax increases and spending cuts will occur throughout the U.S.

The “fiscal cliff” could be as large as 4% of GDP if all the tax increases and spending reductions are allowed to take effect in January.

Besides weighing the prosepect of millions of Americans facing higher tax rates unless the Bush Tax Cuts are extended before January 1st, retailers are also left questioning the full impact of not extending the payroll tax cut, a tax that is taken out of U.S. workers paychecks to fund social security.

Over the past 2 years, 160 million American workers have paid a lower payroll tax rate of 4.2%.

If the payroll tax cut is not extended, the payroll tax rate will increase to 6.2% on the first $113,7000 beginning on January 1st.  

The expiration of the payroll tax cut will increase the taxes for millions of middle-class families.

The average American family received $1,000 in additional income from the lower payroll tax cut which is set to expire at the end of the month unless it is extended during the budget compromise talks.

Fed Meeting

On Tuesday the Fed begins a two-day meeting, with a monetary policy announcement and Fed Chairman Ben Bernanke making a press conference on Wednesday.

The Fed is reaching the end of its monetary quantitative stimulus program, commonly referred to as “Operation Twist”,  a $667 billion financial rotation (“twist”) in which the Federal Reserve sells short-term Treasuries in exchange for buying longer-term Treasuries to accomplish the goal of lowering long term borrowing costs and stimulate the U.S. economy.

Operation Twist amounts to a rotation of $45 billion a month in short-term Treasuries for long-term debt.

The Fed has engaged in three rounds of quantitative easing since 2008.

Europe

Greece is close to reaching its target of nearly $ 30 billion in a buyback of sovereign debt (bonds) that will allow the country to receive financial aid from its international creditors, the “Troika”, consisting of the International Monetary Fund (IMF), European Commission, the European Central Bank (ECB).

The buyback was part of an earlier deal approved by euro area finance ministers on Nov. 27th to reduce Greece’s outstanding debt to 124 percent of gross domestic product by 2020.

Italy

Italian PM Mario Monti, a technocrat and economist, charged with the giant role of reforming Italy’s economy and lowering Italian debt through an unpopular combination of increasing taxes and austerity measures, has announced over the week-end that he plans to step down as prime minister.

The decision came after Silvio Berlusconi’s center right People of Freedom (PDL) party withdrew parliamentary support last week for Monti’s technocrat government. Berlusconi served three times as Prime Minister of Italy from 1994 to 1995, 2001 to 2006 and 2008 to 2011.

Monti’s sudden announcement may eventually clear the way for him to participate as a candidate in an election due  early next year.

Monti is expected to step down as soon as the budget is passed in Parliament before the end of December. His popularity is high with investors across the globe, and his reform measures have helped to lower Italy’s borrowing costs (bond yields) to safer levels (currently 4.78% which is down from 7.48% in late 2011).

Silvio Berlusconi confirmed that he will seek office again but he may be forced to participate in an election much earlier than he expected and at a time when his party is divided and unpopular across Italy.

Italy’s 10 yr. bond has already risen today 0.254 basis points to 4.78%  (when this post was written).

 

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