U.S. President Barack Obama cut short his Hawaiian vacation and flew back to Washington to help break the congressional stalemate in "fiscal cliff" talks, as anxiety mounts over the looming combination of tax hikes and spending cuts that threaten to push the U.S. back into recession.
With just days to go before the Jan. 1 deadline, the White House called on Republicans Wednesday to move forward on a deal to avert the automatic measures.
"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," a senior administration official told reporters travelling back to Washington with the President, who had originally planned to stay in Hawaii until the first week in January.
Mr. Obama was scheduled to land in Washington early Thursday to face a Congress at loggerheads with itself. As Democrats and Republicans continue to spar, the focus is shifting to the Senate – which reconvenes Thursday – as the best hope to forge a compromise.
Meanwhile, there are signs of increasing anxiety about the consequences of failure.
U.S. markets, back after the Christmas break, slipped on Wednesday for the third straight session. Michael Ettlinger, economic policy chief with the Center for American Progress, said markets are pricing in the possibility of a continued stalemate. "No one thinks they're going to come up with a solution by the end of the week," he said.
Some observers blamed the lacklustre U.S. holiday retail season – the worst since 2008 – in part on the so-called fiscal cliff, saying consumers tightened spending out of fears of a tax hike.
On Thursday, markets around the world awaited action upon Mr. Obama's return to Washinton. U.S. markets were flat in early trading.
Treasury Secretary Timothy Geithner added more urgency to the crisis by warning Wednesday that the U.S. will hit its statutory debt limit on Dec. 31 and the Treasury would begin to take "certain extraordinary measures" to stave off default. While some kind of intervention has been expected, Mr. Geithner said in a statement it was impossible to predict how long the extra measures would be effective, "given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013."
Mr. Obama has wanted any budget deal to include measures to address the debt-limit issue.
Despite rising concerns, there were few signs lawmakers were swinging into action in Washington. Neither Democrat Majority Leader Harry Reid nor Republican Minority Leader Mitch McConnell spoke up ahead of the Senate's return to business Thursday.
And while the House of Representatives was told it would get 48 hours notice to return to Washington for negotiations, no notice had been given by Wednesday night.
House Speaker John Boehner and his Republican colleagues put the ball in the Senate's court Wednesday afternoon, releasing a statement that said "the lines of communication remain open," but the Senate must approve or amend the measures the House debated last week.
Mr. Boehner's proposed "Plan B" legislation, which, thanks to strong anti-tax sentiment among Republicans, couldn't even garner enough Republican support to pass in the House, would increase taxes for people earning $1-million or more per year – compared to Mr. Obama's threshold of $250,000, which he has upped to $400,000 in an effort at compromise. The simplest move for the Democrat-controlled Senate would be to amend the Republican bill in Mr. Obama's direction, but Republicans have quashed such proposals.
As the clock winds down, the parties may instead choose to employ a temporary measure to simply delay the Bush-era tax hikes and spending cuts for a few months as negotiations drag on.
William McBride, chief economist with the U.S. Tax Foundation, said he doesn't expect lawmakers to act in time to avoid the deadline, which could knock the wind out of markets. "That's when we'll see some action by legislators," he said.
But the impact may be felt more significantly in the longer term if Congress continues to disagree, extending talks and failing to arrive at a permanent solution until the balance of power changes.
Douglas Elliott, a Brookings Institution fellow and former J.P. Morgan managing director, said markets could sway in either direction in the new year, even if temporary measures are enacted, depending on whether Washington is close to legitimate compromise or simply delaying its decision.