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Fiscal cliff fears hit US stock markets and oil prices No deal on fiscal cliff as Obama goes on holiday
(about 2 hours later)
Fears that the US would fall over its looming fiscal cliff sent stock markets reeling and oil prices dropping on Friday as investors feared the political deadlock in Washington would drag down global growth. Barack Obama left Washington with his family for a Christmas break in Hawaii on Friday night, an acknowledgment that weeks of negotiation over the economy's looming crisis had ground to a halt.
With House members having left Washington on Thursday night for Christmas and Senate members scheduled to leave on Friday afternoon, the prospect of a deal before the 1 January deadline appeared bleak. If there was any sign of a deal, Obama would have delayed his holiday. His departure comes after the debacle in the House of Representatives on Thursday when the Republican Speaker John Boehner was humiliated by his own members, who rebelled against his proposed plan.
Republican House speaker John Boehner signalled that he was not planning to quit after a congressional debacle that left negotiations over debt and spending in chaos. It makes the $600bn (£371bn) of new year tax rises and spending cuts more likely, potentially pushing the US back into recession. Boehner summed up the mood in Washington. "How we get there [to a deal]? God only knows," he said. Boehner signalled on Friday he was not planning to quit as Speaker but he has been left wounded.
On Friday night, Barack Obama said he was "ready and willing" to organise a package to deal with the fiscal cliff, and said there was no reason not to protect middle-class Americans from tax rises. The debacle brought closer the prospect of the country falling over the "fiscal cliff" on 1 January, with all taxpayers facing a rise and automatic cuts in federal spending, from defence to welfare, kicking in.
Obama said he had spoken to Boehner and met Senate majority leader Harry Reid. He said Congress should pass a plan to extend tax breaks for the middle class and extend unemployment benefits, and that there were "real consequences" to how they deal with the across-the-board tax increases and steep spending cuts scheduled to kick in. The House left for holidays on Thursday night and the Senate on Friday. Obama's holiday has been an on-off affair. With the election behind him, he had scheduled a long break, beginning on Friday, but last week the White House indicated he was unlikely to leave until the crisis had been resolved.
The White House on Friday announced that there had been another change and he was leaving after all.
In a statement, Obama suggested he would be back in Washington next week, much earlier than he had planned and expressed optimism that a deal could still be reached before the new year.
"So, as we leave town for a few days to be with our families for the holidays, I hope it gives everybody some perspective. Everybody can cool off; everybody can drink some eggnog, have some Christmas cookies, sing some Christmas carols, enjoy the company of loved ones," he said.
"And then I'd ask every member of Congress while they're back home to think about that. Think about the obligations we have to the people who sent us here. Think about the hardship that so many Americans will endure if Congress does nothing at all."
He added: "We just have to do the right thing. So call me a hopeless optimist but I actually still think we can get it done. And with that, I want to wish every American a merry Christmas. And because we didn't get this done, I will see you next week."
Fears that the negotiations would fail sent stock markets reeling and oil prices dropping on Friday as investors feared the political deadlock in Washington would drag down global growth.
Boehner summed up the mood in Washington. "How we get there [to a deal]? God only knows," he said.
The stall in any deal led to a sell-off on US stock markets, with the Dow industrial average falling more than 120 points.The stall in any deal led to a sell-off on US stock markets, with the Dow industrial average falling more than 120 points.
Jack Ablin, the chief investment officer at BMO Harris bank, said the sell-offs would continue until a deal emerged. "Every day that there isn't an agreement will be a drag on the economy," he said.Jack Ablin, the chief investment officer at BMO Harris bank, said the sell-offs would continue until a deal emerged. "Every day that there isn't an agreement will be a drag on the economy," he said.
Oil prices dropped, with Brent crude falling more than $1 a barrel to $109. But the dollar rallied, along with US government bonds, as investors shifted funds from risky assets into perceived safe havens. The FTSE 100 hit a low of 5894 points, but inched up to end the day down 0.3% at 5958 – still shy of the significant 6000 mark. Oil prices dropped, with Brent crude falling more than $1 a barrel to $109. But the dollar rallied, along with US government bonds, as investors shifted funds into perceived safe havens.
Germany's stock market was down 0.5% after consumer confidence dropped to its lowest level in more than a year.
The gloomy mood contrasted with earlier this week, when Obama and Boehner had been closing in on a deal. But the Democrats and Republicans appear further apart than they did a month ago after the stunning reversal in Congress on Thursday night.
Boehner's credibility as Speaker is on the line after he failed to push through a Republican bill aimed at offering a short-term fix. He had to withdraw it when confronted by a revolt by mainly Tea Party-backed Republican members of Congress unwilling to countenance any tax rises.
Richard Griffiths, associate director of Berkeley Futures, said: "The market just stopped in its tracks after that unexpected announcement. But it's showing resilience. It's not down by that much and people think it's just a delay before they reach a deal in maybe three weeks' time."Richard Griffiths, associate director of Berkeley Futures, said: "The market just stopped in its tracks after that unexpected announcement. But it's showing resilience. It's not down by that much and people think it's just a delay before they reach a deal in maybe three weeks' time."
Although Boehner denied he was washing his hands of the issue on Friday and said he would continue talks, he in effect abandoned the process by saying it was up to the Senate and the White House rather than the House of Representatives to come up with a solution.
Sean West, policy analyst at political risk consultancy Eurasia Group, said the breakdown meant the US was "in a different world than it was earlier this week".
Boehner faces an election for Speaker early in January when the new Congress convenes. Asked at the press conference if he was concerned about his job, he said: "No, I'm not. Listen, you've all heard me say this and I've told my colleagues the same thing, if you do the right things every day for the right reasons, the right things happen."
What made the debate such a humiliation for Boehner was that it was a purely Republican one. The so-called plan B bill would have limited tax rises in January just to those earning £1m or more a year. Democrats want the rises to kick in at $250,000 or else, as Obama proposed, $400,000.