September 17, 2019

Fundamentally: Fiscal Impasse Now Takes Center Stage for Investors

The conventional wisdom is that the fight over this so-called fiscal cliff “may cause investors to sell, and contribute to more volatility in the coming month or two,” said Jeffrey N. Kleintop, chief market strategist at LPL Financial.

History shows only that the markets tend to be volatile and unpredictable in the aftermath of close national elections. In election years since 1976, between Election Day and Dec. 31, the Standard Poor’s 500-stock index has lost as much as 9.6 percent and gained as much as 7.6 percent.

Still, despite the real possibility of economic peril — the Congressional Budget Office predicts that gross domestic product will shrink next year if Congress and the White House can’t reach an agreement — a recession and bear market aren’t the only possible outcomes that investors should brace for.

For starters, many economists think that while certain items may be allowed to lapse, like the payroll tax holiday and extended emergency unemployment benefits, they doubt that Congress and the White House would allow the economy to go completely a full fall. In fact, the consensus among forecasters surveyed by Blue Chip Economic Indicators is that the economy will avoid recession and grow modestly in 2013.

Earlier this year, the budget office predicted that the full possible effects of the situation — including the expiration of the so-called Bush tax cuts and automatic spending reductions put in place in last year’s contentious debt-ceiling debate — could shave as much as $800 billion off gross domestic product in 2013.

But Mike Dueker, chief economist for Russell Investments, says he thinks policy makers may ultimately reach a fiscal-tightening agreement that will result in a much smaller drag on G.D.P.

Marie M. Schofield, chief economist at Columbia Management Investment Advisers, agrees that a moderate tightening is likely. “The question in my mind is if this is going to be a fiscal cliff or a fiscal bunny hill,” she said. Rather than let everything expire and kick in, she said, Congress could find a way to postpone certain important decisions.

If Congress were to stretch out the crisis over several months, it could mute these problems enough to make them manageable in investors’ minds, said James W. Paulsen, chief investment strategist at Wells Capital Management.

Mr. Paulsen notes that, like the European debt crisis this year, the situation might turn out to be a series of chronic problems that are dealt with sequentially, not as a single financial disaster.

There is some evidence, he says, that the market views the problem in these terms. Despite growing concerns this year, he notes that the CBOE Volatility Index, or VIX, a closely watched gauge of investor fear, remains below 20, after having approached 50 last summer.

“To me, this is evidence that the financial markets are desensitized to this doomsday thinking,” he said.

He notes that many elements of the economy are healing in the meantime.

The labor markets, for instance, are slowly but surely improving. Consumer confidence is at a five-year high. And the housing market shows clear signs of a rebound. The latest reading of the Case-Shiller Home Price Index, for instance, found that home values in the 20 largest metropolitan markets gained 0.9 percent in August over July.

G. Scott Clemons, chief investment strategist of Brown Brothers Harriman, says the nascent housing recovery is significant.

“The real engine of economic activity is still personal consumption,” he said. “So the housing and labor markets are the canaries in the coal mine for the economy. As long as those parts of the economy are still chirping, we’re fine.”

Henry B. Smith, chief investment officer at Haverford Trust, sees another script to consider.

While it’s not the most likely outcome, there is a possibility that the debate in Washington will eventually lead to major tax and spending reforms.

Under this bullish alternative, he said, the lame-duck Congress finds a way to postpone spending cuts for at least a couple of quarters. Then, beginning next year, the president and Congress tackle spending, taxes and entitlements not in piecemeal fashion, but through a comprehensive tax reform and deficit reduction plan.

“If that were to happen, in our view, you’d see everyone’s 2013 G.D.P. estimates come up,” he said, adding that it would unleash pent-up demand both in the economy and the markets.

Paul J. Lim is a senior editor at Money magazine. E-mail:

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Off the Charts: The Year That Governments Lost Their Credibility

Then Europe announced its second plan to rescue Greece, the first one, reached more than a year earlier, having turned out to be completely inadequate. That’s when 2011 became exciting and the losses began to pile up.

The summit meeting of European leaders on July 21 in Brussels called for private investors to take losses of 21 percent on some Greek bonds, but for a rescue package to keep losses from being worse. At first markets reacted with enthusiasm, but that deal did not last long enough to even write out the details.

The European leaders had drastically underestimated the problem and misunderstood the risk that fears of default would spread to other countries.

Within weeks, it became clear that 2011 would be remembered as the year that governments lost their credibility. Markets, which had always assumed that major Western governments would honor their obligations, struggled to learn to adjust to a new world where that was not so certain.

At the same time Europe was failing to come to grips with its problems, President Obama was in negotiations with Congressional Republicans over a possible deal to raise the debt ceiling and avoid an American default. In the end, there was no default, but the fact that some politicians seemed to think one was a good idea was unsettling to investors. In August, Standard Poor’s cut the country’s credit rating from AAA to AA-plus.

Oddly, the downgrade of the United States seemed to help its financial markets. Whatever a rating agency might think, the United States seemed to be a bastion of safety and relative certainty. Treasury bond prices rose and yields fell. And the American stock market, while it became extremely volatile, more than held its own. Depending on what index is used, American stocks rose a little or fell a little during the year, although they ended lower than they had been when the European leaders announced their Brussels agreement. The MSCI index for the United States ended with a 2 percent rise.

Late in the year, Europe tried again to find a way out of its financial morass, and may have done a better job. The European Central Bank offered unlimited three-year loans to European banks, which seemed to be willing to take the money — at a 1 percent interest rate — and buy government securities that will mature before the central bank’s loan must be repaid. In the final week of the year, Italian debt auctions produced rates of 3.2 percent on six-month bills, but more than double that for 10-year-bonds. European share prices seemed to stabilize.

The accompanying charts document the trend in share prices for the world and for 12 stock markets, using MSCI indexes to assure comparability, and document how the investment world changed as it became clear that the July 21 Brussels accord had accomplished little. The indexes include reinvested dividends, and are all calculated in dollars. The countries shown are six nations in the euro zone, the area most directly affected by the European deliberations, and six other major markets around the world.

On July 22, the day after the Brussels accord, the MSCI world index — which includes markets in all developed economies but not in emerging markets like China — was up 7.1 percent since the end of 2010. Even poor Greece had a stock market that was almost even for the year, thanks to a 7.5 percent rise on that day.

As the year neared an end, the Greek market was down more than 60 percent. From its 2007 high, the market has lost 92 percent of its value. From top to bottom during the Great Depression, the Dow Jones industrial average fell just 89 percent.

The pain was also intense in other European countries. In all of the other five euro zone countries shown — Germany, France, Italy, Spain and Portugal — prices declined significantly after that July meeting. Germany, the dominant economy in Europe, and the one that did the most to keep the bailout packages from growing too large, suffered the most. Italy, down 19.5 percent after the meeting, did the best.

Outside the euro zone, the loss of confidence also echoed. India’s stock market lost nearly a third of its value after the summit meeting, and China’s fell by nearly 20 percent. The losses in the United States, Britain and Japan were smaller.

The rise in volatility was even more impressive. The charts show the proportion of trading days in each market in which prices either rose or fell at least 2 percent during the day. For the world as a whole, the proportion went from 1 percent in the months before the summit meeting to more than a quarter of the days after that. In Germany, about one day in two exceeded that threshold after the meeting.

When the euro was created in 1999, Europeans voiced hope that a common currency would help the Continent reassert its economic influence in the world. In 2011 that happened, although not in the way the creators of the euro had envisioned.

Floyd Norris comments on finance and the economy at

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Political Memo: Congress Takes Up a Partisan Battle, Again, Over Spending

Shutting down the government. Again.

For the third time in a year, the divided 112th Congress is dancing on the edge of catastrophe, locked in a bitter partisan battle over fiscal measures, with unrelated policy debates clinging to the side.

Republicans and Democrats do not agree on how to pay for something that both sides claim to want — extension of a payroll tax holiday for almost every worker — and have until the end of the year to work it out or see the tax go up, something that most economists say would further damage the nation’s fragile economic health by taking money out of consumers’ pockets.

Now tied to this measure is a plan to keep the government financed through the rest of the fiscal year, because Senator Harry Reid, Democrat of Nevada and the majority leader, has indicated that he will not permit a vote on the huge spending measure until Republican and Democrats can come together on the payroll tax bill, which would also include an extension of unemployment benefits.

If an agreement on the spending bill does not come by midnight Friday, the government will be unable to pay its bills unless Congress passes yet another stop-gap financing bill to buy time, something the White House indicated late Wednesday night that it would prefer. 

Leaders of both parties say they are determined to avoid a pre-Christmas shutdown, raising the possibility that Congress may just pass a short-term bill to keep the government open and kick the whole payroll tax and spending mess into next year.

The ugly dynamic mirrors the battles of last spring, when the government came within a whisker of shutting down over a spending fight, and last summer, when the nation almost defaulted on its debt obligations when Congress fought over raising the debt ceiling.

Now, with Congress entering a winter of discontent, each side expressed outrage — much of it manufactured — on Wednesday and blamed the other side for the potential debacle looming at the end of the week.

After meeting privately with President Obama on Wednesday, Senate Democrats began to cobble together a new deal to extend the payroll tax without using a surcharge on incomes over $1 million, something Republicans detest. They hope the new measure will have legs in both chambers, but Mr. Obama’s press office said Wednesday that the president would like Congress to pass a short-term financing measure, known as a continuing resolution, for now. 

At the same time, House Republicans, who have already passed a payroll tax extension that Senate Democrats oppose,  late Wednesday night filed their own spending bill that they may bring to the floor Friday it an attempt to pass it,  leave town and force the Senate either to take or leave the House measure. But it was far from clear that they had the necessary votes to execute that tactic.

The last-minute wrangling is the predictable outgrowth of the failure last month of the special Congressional committee assigned to find $1.2 trillion in deficit savings. The panel was supposed to take care of the payroll tax holiday, the extension of unemployment issues and numerous other things, but its collapse left the fate of those issues and others up in the air.

The threat of the potential December shutdown is even more bizarre than the previous two near-misses, because it centers on the rank-and-file Republicans’ reluctance to extend a tax cut to middle-class workers and relatively minor issues over a spending bill that each side was tantalizingly close to signing off on.

This latest in a series of high-profile, last-minute fights, all in a single year, underscores that the 112th Congress has no modern antecedent for what many see as its unusual — and potentially dangerous — brinkmanship.

“This whole year has been historic in its patterns,” said Thomas E. Mann, a senior fellow at the Brookings Institution. “They always get work done at the end of sessions, they always put things off until they have to do them, but it’s the hostage taking and recklessness of it all that is so unusual.”

The day began with Mr. Reid sparring with Senator Mitch McConnell of Kentucky, the minority leader, on the Senate floor, with Mr. Reid expressing bafflement over Mr. McConnell’s refusal to let the Senate vote on the House payroll tax bill that passed earlier in the week.

Mr. Reid wants to quickly vote the bill down because while it would extend a cut in Social Security payroll taxes for 160 million workers, it also eases the way for an oil pipeline opposed by environmental groups, blocks certain air pollution rules, freezes the pay of many federal employees through 2013, increases some Medicare premiums, and greatly reduces unemployment benefits and adds a host of new rules for receiving them.

Mr. McConnell said he would not permit a quick vote on the measure until the spending agreement was passed in the Senate.

For their part, Senate Democratic leaders met with President Obama at the White House and resolved to prepare a new offer that would exclude their earlier plan to pay for the payroll tax holiday with a surcharge on incomes over $1 million, seeking savings instead from a variety of federal programs, with many of the cuts culled from the failed bipartisan committee’s list of things both sides agree upon.

As talk of another short-term spending agreement circulated, Jay Carney, the White House spokesman, said such a plan was not ideal but could be employed if a shutdown loomed.

Given the “dysfunctionality” that Congress has demonstrated this year, Mr. Carney added, it would be hard to “suggest that this Congress is capable of achieving an ideal.”

At the House, Speaker John A. Boehner said the ball was in the Senate’s court, even as he suggested that his chamber might pass its own spending bill based on a bipartisan agreement that was near completion, in spite of some Democratic concerns about provisions that would limit family planning for women in the District of Columbia and restrict visits to Cuba by Cuban-Americans.

“There is no reason for it to be held hostage to try to give one side leverage,” Mr. Boehner said.

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Car Sales Improved in August; G.M. Up 18%

General Motors said its sales in the United States rose 18 percent from August 2010, and the Ford Motor Company reported an 11.2 percent increase.

Chrysler said sales were up 31 percent. That included a 58 percent increase for its Jeep sport utility vehicles.

August marked the 17th consecutive month of year-over-year increases for Chrysler, whose recovery is gathering momentum after being written off by many critics after its 2009 bankruptcy.

Nissan reported a 19.2 percent gain, and Volkswagen said sales rose 10.4 percent.

G.M. said it remains confident in its full-year forecast for the entire industry of at least 13 million sales, even as many analysts have chopped their projections recently.

“Consumers are being cautious, and appropriately so, but they are not retrenching,” said Don Johnson, G.M.’s vice president of United States sales operations, on a conference call. “All indications to us are that the industry is going to slowly grow for the rest of this year.”

Other carmakers were scheduled to report sales later Thursday. Analysts were forecasting another month of disappointing numbers from Toyota and Honda, whose inventories were decimated by the earthquake and tsunami in Japan in March. Nissan, which was able to return to normal production levels much faster, ran ads last month juxtaposing the abundance of inventory at its dealerships with bare Honda showrooms.

August began with uncertainty caused by the debt-ceiling debate in Washington, and ended with much of the East Coast focused more on the weather than on buying a new car. In addition, some shoppers probably stayed on the sidelines in the hope of getting a good deal during the upcoming holiday weekend, said Jeff Schuster, executive director of global forecasting at J. D. Power and Associates.

“We did see things get a little bit weaker as we got into the second half of the month,” Mr. Schuster said. “Many buyers are still conditioned to the strong Labor Day sales, so we could have seen some buyers pull back their purchase decisions waiting for some deals.”

From January through July, total industry sales rose 10.9 percent. Excluding the 7.1 percent decline at Toyota and 2.6 percent decline at Honda, rest of the industry was up 16.6 percent.

“The reality on the ground is not as bad as the market has inferred from the weakness in economic data,” Peter Nesvold, an analyst with Jefferies and Company, wrote in a report this week. “September will be the acid test of underlying demand for the rest of the year as headwinds from tight inventory and the debt ceiling debacle dissipate, in our view.”

Nissan pulled further ahead of G.M. last month in the battle between the Leaf electric car and the Chevrolet Volt plug-in hybrid. Leaf sales for the month were 1,362, more than quadruple the Volt’s 302. G.M. halted production of the Volt this summer to retool in preparation for a large increase in production and said it is still working to build inventory of the car enough to meet demand. It has promised significantly higher Volt sales in the months ahead.

“Every unit that we ship right now is pre-sold,” said Alan Batey, the head of Chevrolet sales in the United States. “It’s essentially a magnet for us. It’s doing a wonderful job for the brand.”

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Market Ills Give CNBC a Bounce

Having left The Journal in 2010 for CNBC, Mr. Deogun is now in charge of the network’s coverage of the gyrating global markets, a fresh crisis that has restored CNBC to prominence among retail investors who temporarily tune into business news in turbulent times.

This time, however, there is stiffer competition from the Fox Business Network and Bloomberg Television, both of which are hoping to take advantage of what they perceive as CNBC’s vulnerabilities.

The markets’ wild swings are not necessarily profit-generating for TV news outlets because most advertisers buy airtime far in advance, meaning that the prices do not rise in tandem with the ratings. But coverage of crises can burnish reputations, as the networks attract worried viewers who sample news and stock-picking shows for the first time — or at least for the first time in a long while.

So far, CNBC — not its smaller rivals — seems to be benefiting the most from interest this month in the last-minute agreement on the United States debt ceiling, the Standard Poor’s downgrade of America’s debt rating and concern over the stability of European banks.

Through the first two weeks of August, CNBC, a unit of NBC Universal, had on average 378,000 at-home viewers during the New York market hours of 9:30 a.m. and 4 p.m., up sharply from 224,000 in July.

Fox Business, a unit of the News Corporation, had an average of 107,000 viewers at those hours, up from 76,000 in July. Bloomberg Television is not publicly rated; private ratings indicate that it too had a surge in recent weeks, though its audience is smaller than that of Fox Business.

It is exceedingly hard to estimate the reach of the business networks. CNBC, despite being dominant, flatly declines to talk about ratings because it says Nielsen’s sample does not count out-of-home viewing or affluent viewers, exactly the kinds of viewers it says it attracts.

The Nielsen ratings nonetheless serve as a barometer of sorts in good business times and bad. CNBC’s at-home audience has not been this big since the so-called flash crash of May 2010, reaffirming that people are once again paying attention to the ups and downs of the markets.

Kevin Magee, the executive in charge of the Fox Business Network, said that periods of big financial news usually helped “the new guy.” Fox Business started in October 2007, and Mr. Magee is quick to point out that CNBC has both a 20-year head start and enviable distribution. (CNBC is available in about 100 million households, while Fox Business is in about 57 million.)

Still, he said that once viewers found his network, “they have a tendency to stay with us after that.”

Fox Business broke even for the first time in the fiscal year that ended June 30.

“It’s a better channel today than it was 12 months ago,” the News Corporation chief operating officer, Chase Carey, said on a conference call with reporters last week. Among other changes, it has added a program featuring Lou Dobbs at 7 p.m. and a libertarian-oriented talk show, “Freedom Watch,” at 8. Those two hours occasionally outperform CNBC, but during market hours, CNBC is always on top.

Some at CNBC have said they regard Fox Business as another political flavor of Fox News, though Mr. Magee said that notion “has no credibility in the industry other than in the hallways of Englewood Cliffs,” the New Jersey town where CNBC is based.

Nielsen data shows 81 percent of Fox Business viewers also watch Fox News, while 31 percent of CNBC viewers also watch Fox News.

Of course, as the third-biggest channel on all of cable, Fox News is an asset for its little brother — which is why it simulcast Fox Business for two hours on Aug. 7.

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Economix: Podcast: Double-Dip Fears and Grab-and-Go Food

August is off to a rocky start.

Despite an agreement to raise the debt ceiling just hours before the government’s borrowing authority was set to run out, investors quickly switched their focus to the European debt crisis and weak prospects for the United States economy and pummeled stocks.

In the Weekend Business podcast, Floyd Norris, chief financial correspondent for The Times, discusses the possibility of a double-dip recession for the United States and the troubles plaguing Europe. In addition, he suggests that the unemployment report for July, which showed a better-than-expected gain of 117,000 jobs, could be overstating seasonal adjustments.

One place where workers seem pretty happy is Pret A Manger, the British fast-food chain. Its annual work force turnover rate is about 60 percent — low for the fast-food industry, where the rate is normally 300 to 400 percent. As David Gillen discusses with Stephanie Clifford, the chain is slowly expanding in New York and other American cities with its own brand of grab-and-go food and, more significant, a fresh approach to service. At Pret, the goal is to serve customers within 60 seconds, and with maximum currency.

You can find specific segments of the podcast at these junctures: Floyd Norris (15:51); news headlines (10:52); Pret A Manger (8:28); the week ahead (0:58).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

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Stocks and Bonds: World Markets Staggered by Weak Consumer Data

The broader United States stock market dropped 2.6 percent, erasing all of its gains for the year. That capped a string of declines over seven consecutive days, its longest losing streak since October 2008.

Fears of a sovereign default in either Italy or Spain re-emerged, and the interest rates on those countries’ bonds soared. United States Treasury yields fell sharply to their lowest level in nearly a year as investors fled to the safety of American assets but also fretted over sclerotic economic growth. Gold, seen as another safe haven, leapt to a record high.

European markets initiated the descent and the United States soon followed, despite Senate approval of an agreement to lift the debt ceiling and cut more than $2 trillion from federal spending.

The markets and the breaking of the budget impasse have been overwhelmed by bad economic news and the chances of more. On Tuesday, a report showed consumers cut spending the most in nearly two years. Attention turned to Friday’s report on unemployment.

Market analysts and economists made clear that even though the debt limit agreement averted a potential default on United States debt, the drawn-out process had taken its toll.

“As the macro data comes out, it seems like we may have more on our hands than just getting the debt ceiling raised,” said Myles Zyblock, chief institutional strategist and managing director of capital markets research at RBC Capital Markets.

“We get no default, but the bad news is there is a growth trade-off,” he said. “They had to agree on fiscal contraction that would weigh on growth.”

Stanley Nabi, the chief strategist for Silvercrest Asset Management Group, said he was starting to hear the word “recession” in questions from clients over the last few days.

Recent economic data is already weak, he said, noting the G.D.P. revisions on Friday that indicated the recession was deeper and the recovery more fragile than originally thought. On Tuesday, the Commerce Department said personal spending fell 0.2 percent in June, the first time it has declined since September 2009. And now that the debt ceiling deal has offered up the prospect of lower spending from the government, Mr. Nabi said, “Who is going to drive the economy?”

“You can’t rely on capital spending,” he said. “Trade is not strong enough to make that much of a difference. As far as the economy is concerned, what the data is showing is the economy has no momentum.”

Lawrence Creatura, portfolio manager at Federated Investors, said, “The challenges that we are facing economically are that the hits just keep coming. We do have somewhat of a resolution to our budgetary impasse, but that does not overwhelm the fact that, economically speaking, that the data continues to deteriorate.”

The Standard Poor’s 500-stock index was down 32.89, or 2.56 percent, at 1,254.05, erasing all of the gains it had made this year. The Dow Jones industrial plummeted 265.87 points, or 2.19 percent, to 11,866.62, with a big dropoff toward the end of trading. And the Nasdaq index fell 75.37 points, or 2.75 percent, 2,669.24.

As the markets spiraled, analysts sifted through indexes, graphs and numbers, trying to balance risk and opportunity.

Stephen Wood, the chief markets strategist for Russell Investments, noted that the so-called fear index, or Vix, was “bouncing around a lot.” It was down at 24.67, below its high for the year, but also up from the last few weeks when it had hit the teens, even as low as 14.62 at the end of April.

“This is a risk-on, risk-off market,” Mr. Wood said. “You see waves of risk acceptance, then risk aversion.

“My take on it is volatility will be your constant travel companion,” he said, listing the recent euro zone problems, the latest debt ceiling debates, talk of a United States credit downgrade and the potential for an economic slowdown ahead.

“A lot of these variables need to be priced in,” he said.

Graham Bowley contributed reporting.

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Long Battle on Debt Ending as Senate Set for Final Vote

Despite the tension and uncertainty that has surrounded efforts to raise the debt ceiling, the vote of 269 to 161 was relatively strong in support of the plan, which would cut more than $2.1 trillion in government spending over 10 years while extending the borrowing authority of the Treasury Department. It would also create a powerful new joint Congressional committee to recommend broad changes in spending — and possibly in tax policy — to reduce the deficit.

Scores of Democrats initially held back from voting, to force Republicans to register their positions first. Then, as the time for voting wound down, Representative Gabrielle Giffords, Democrat of Arizona, returned to the floor for the first time since being shot in January and voted for the bill to jubilant applause and embraces from her colleagues. It provided an unexpected, unifying ending to a fierce standoff in the House.

The Senate, where approval is considered likely, is scheduled to vote at noon on Tuesday and then send the measure to Mr. Obama less than 12 hours before the time when the Treasury Department has said it could become unable to meet all of its financial obligations.

The deal sets in motion a substantial shift in fiscal policy at a moment when the economic recovery appears especially fragile. Although the actual spending cuts in the next year or two would be relatively modest in the context of a $3.7 trillion federal budget, they would represent the beginning of a new era of restraint at a time when unemployment remains above 9 percent, growth is slowing and there are few good policy options for giving the economy a stimulative kick.

The precise impact on the economy is a matter of debate. Proponents of spending restraint say that the economy will benefit in the long run from getting the deficit and the accumulated national debt under control, and that failure to act now would risk long-term decline in the nation’s economic might. Others say that by foreclosing the option of using government spending to counteract economic weakness, the country is increasing the risk of persistently high unemployment and even another recession.

The negotiations exposed deep fissures within both parties. In the end, 174 Republicans and 95 Democrats backed the deal, and 66 Republicans and 95 Democrats voted against it. But Republicans and Democrats alike made clear they were not happy swallowing the agreement, which was struck late Sunday between the bipartisan leadership of Congress and President Obama.

Top lawmakers characterized the bill as a must-pass measure needed to prevent a potentially crippling blow to the struggling economy.

“The default of the United States is not an option,” said Representative Steny H. Hoyer of Maryland, the No. 2 Democrat.

Mr. Hoyer urged lawmakers to vote not as members of either party, but as “Americans concerned about the fiscal posture of their country, about the confidence that people around the world have in the American dollar.”

Republicans, while expressing dissatisfaction that the measure did not provide more savings, said it was a modest but useful first step in reversing the government’s spending course and claimed they had prevailed by keeping the agreement free of new revenue and offsetting the increase in the debt limit with spending cuts.

“I would like to say this bill solves our problems,” said Representative Jeb Hensarling of Texas, a prominent fiscal hawk in the Republican leadership. “It doesn’t. It is a solid  first step.”

Worried about defections by conservatives and liberals alike, leaders of both parties gathered their members for briefings to explain the proposal. Speaker John A. Boehner met specially with Republicans on the House Armed Services Committee, an important voting bloc whose members were raising alarms about potential spending cuts for the Pentagon.

Democrats, many disgruntled over what they saw as a White House-negotiated giveaway to Republicans, heard from Vice President Joseph R. Biden Jr., who told House and Senate members in separate meetings that the administration had to cut the deal with uncompromising Republicans to avoid a default.

Mr. Biden spent hours behind closed doors in the Capitol. According to participants in the meetings, he mixed listening and gentle persuasion, urging Democrats to back the plan.

Administration officials fanned out to make a case that the deal’s structure — with a trigger that could force deep cuts in military spending as well as in domestic programs if the two parties cannot agree on how to reduce the deficit further — provided Democrats with more leverage to push for higher tax revenue as part of the solution rather than relying totally on spending cuts.

But many Democrats said they saw it as a deal negotiated on the backs of poor and working-class Americans, with no sacrifice by the rich in the form of tax increases.

“I wouldn’t call it anger, but we are perplexed that it has turned out like it has,” said Representative G. K. Butterfield, Democrat of North Carolina, grimacing as he left the Biden meeting. “But we’ve run out of options and we know the consequences. I’ve heard horror stories from the Great Depression. I don’t want my fingerprints on that.”

Jeff Zeleny and Jennifer Steinhauer contributed reporting.

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Focus Turns Back to Fed on Economy

Failing to raise the debt ceiling could lead to an economic catastrophe. But even if the Senate on Tuesday joins the House in agreeing to let the government borrow more money, there is mounting evidence that the political turmoil has made a bad economic situation worse.

Manufacturing activity declined in July, a trade group reported Monday. Unemployment is climbing. So is inflation.  And the high pitch of partisan rancor in Congress makes it difficult for either party to advance their incompatible economic agendas.

The deal to raise the debt ceiling would reduce federal spending this year by billions of dollars, exacerbating a broader downturn in federal aid as the stimulus peters out. A payroll tax cut and extended benefits for the unemployed are scheduled to expire at the end of the year.

Ben S. Bernanke, the chairman of the Federal Reserve, said in the spring that it was time to see whether the economy could stand on its own. Last month he said the Fed would consider new steps if conditions deteriorated significantly. As the Fed’s policy-making committee prepares to meet Aug. 9, the drums are beating louder.

“I don’t think they can do anything until we see how much was lost and how much we can recoup,” said Diane Swonk, chief economist at Mesirow Financial. “But if we have persistent weakness, and stagnant employment growth through the third quarter, I just don’t see how they can’t step back into the game.”

The Fed already is engaged in a vast and unprecedented effort to bolster economic growth. It has held short-term interest rates near zero for almost three years, and amassed more than $2 trillion in Treasuries and mortgage bonds to hold down long-term rates. But since the end of June, when it completed its most recent round of asset purchases, the Fed has chosen to stand pat.

Its available options now are modest steps including replacing its promise to maintain low rates “for an extended period” with a more specific commitment, like a six-month minimum. More aggressive steps could include tilting the composition of its investment portfolio toward longer-term Treasury securities, to increase the downward pressure on long-term rates. The most drastic step, which analysts also consider least likely, would be a decision to increase the size of its portfolio.

For the moment, and for as long as possible, the central bank would like to do nothing. There is broad agreement that the unprecedented size of the Fed’s portfolio has complicated its ability to control the pace of inflation, and that additional purchases would exacerbate the difficulty.

Mr. Bernanke has said that growth must weaken and price increases abate. A vocal minority of Fed officials has gone further, arguing the central bank has reached the limit of its powers.

“It seems unlikely that the forces limiting the pace at which U.S. growth is recovering are amenable to monetary policy,” Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, said in a speech last week. “Additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth.”

The Fed is even less eager to renew its interventions into financial markets. The central bank has hovered on the edge of the debt ceiling debate like a homeowner riding out a hurricane, hoping for limited damage to the lethargic economy.

“I want to eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt,” Mr. Bernanke told Congress in July.

Even if the Congress meets President Obama’s Tuesday deadline for a debt ceiling deal, the ratings agency Standard Poor’s has warned that it may downgrade long-term Treasury bonds, altering a basic premise of many financial transactions and unleashing smaller but still significant disruptions.

“If a huge amount of harm is being done to the markets and the economy, they will have to consider carefully whether there’s anything they can do to help,” said Donald L. Kohn, who stepped down last June after serving four years as vice-chair of the Fed’s board of governors. “The point of that would be to help the markets get through a chaotic period.”

During a previous debt ceiling standoff, which ran from the fall of 1995 through the spring of 1996, the Fed considered offering loans to banks that did not receive expected payments from the government, and honoring defaulted Treasuries as collateral, according to Alan Blinder, who served as vice chairman of the board of governors at the time.

“We had extensive discussions with the principal clearing banks in New York which then were Chase and Bank of New York,” said Mr. Blinder, now a Princeton economics professor. “What we on the board were most worried about was preserving the remnants of the Treasury market because of its central role in providing liquidity to the whole system.”

The Fed also could buy dollars in the event of a downgrade. Uncertainty already is driving investors to other currencies, and a sharper decline could undermine the dollar’s role as an international reserve currency — a status that has significant benefits for the American economy.

Such a step would be taken at the behest of Treasury, because the administration sets currency policy.

But there are strong reasons to doubt the government would try such an intervention. A weaker dollar could bolster growth by making American exports more attractive. In particular, it could improve the balance of trade with China — while intervening to prop up the dollar would undermine the credibility of American efforts to convince China to stop manipulating its currency.

Perhaps most important, intervening in exchange markets may not prevent the dollar’s fall. “If the dollar were just weak because people had lost confidence in the U.S. government, I don’t see why buying dollars is going to restore confidence,” said Mr. Kohn, now a senior fellow at the Brookings Institution. “The cure for that isn’t intervention. The cure is the government acting like adults.”

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Bucks: Monday Reading: Homeowners’ Delusions About Flood Risk

August 01

Monday Reading: Homeowners’ Delusions About Flood Risk

The latest on the debt ceiling, a Prius that hauls more stuff, movie prices, video store overhauls and other consumer news from The New York Times.

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