Fed’s Monetary Stimulus Meets “Fiscal Cliff”

The contrast could not be sharper: Economists are all but certain the U.S. Federal Reserve will expand its monetary stimulus this week, but they have no clue how the fiscal battle in Congress will shake out.

U.S. central bankers look set to extend their monetary stimulus, known as Quantitative Easing, into the new year at a meeting on Tuesday and Wednesday. Analysts expect the Fed to continue buying $85 billion worth of securities per month.

"The Fed would not have emphasized the number ‘$85 billion' in securities purchases in its statement if it wasn't prepared to continue at that pace well beyond the end of the year," said Roberto Perli, a senior managing director at investment research firm ISI.

No matter what it does, Fed Chairman Ben Bernanke has made it clear the central bank lacks the firepower to counter the possible drag from the looming $600 billion combination of expiring tax cuts and automatic spending reductions popularly known as the "fiscal cliff."

Alarm over an immediate, looming deadline may be overstated. Some analysts say the cliff is better described as a slope, since not all provisions will kick in at once. But Congress' budget watchdog and the Fed both think it spells recession.

The world is watching with bated breath, particularly given the fragile state of other major economies.

Geithner predicts Republicans will yield on taxes

Treasury Secretary Timothy Geithner pushed Republicans on Sunday to offer specific ideas to cut the deficit, and predicted that they would agree to raise tax rates on the rich to obtain a year-end deal and avoid possible economic doom.  But the top U.S. Republican, Speaker of the U.S. House of Representatives John Boehner, stood firm and renewed his stand against increased tax rates, leaving talks at a stalemate.

"Here's the problem," Boehner told "Fox News Sunday" as both sides took their battle to TV talks shows. "When you go and increase rates, you make it more difficult for our economy to grow," he said.  Besides, Boehner said, if Republicans agreed to give President Barack Obama $1.6 trillion in new tax revenue, "He's going to spend it," not reduce the deficit.

Geithner, Obama's top negotiator, said in a separate appearance on Fox that Republicans must step up.

The treasury secretary said Republicans will be responsible if no deal is reached by the end of the month, triggering the "fiscal cliff," deep automatic spending cuts and across-the-board tax hikes that could plunge the country into a recession.  "There's not going to be an agreement without rates heading up," Geithner said on CNN's "State of the Union."

With polls showing most Americans favor raising tax rates on the wealthy and cracks starting to appear in what had been a solid wall of Republican opposition to such a move, the Obama administration figures it has the upper hand.

"The president has seen a lot of options from us. There are a lot of them on the table and I'm hopeful that the conversation will continue," Boehner said.

Boehner also reaffirmed his party's opposition to Congress giving the president sole authority to increase the U.S. debt limit, a power both Democrats and Republicans value.  "Silliness. Congress is never going to give up this power," Boehner said, explaining it provides lawmakers needed leverage in dealing with the White House.