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Sequestration deadline looms as US political brinkmanship prevails

President Obama continues to warn of the potential cataclysmic economic impact from sweeping budget cuts that will trigger in just three days without a deal, as the United States may face more serious ramifications, culminating in prolonged fiscal debates in the months ahead. With such little time before the deadline, i.e. the $85 billion in reductions for this year, Obama and Republicans led by House Speaker John Boehner yesterday traded barbs at each other, doling blame for the extended impasse. The president and his Cabinet officers made a big to highlight the lost jobs, long lines at airports, delays at ports and cutbacks at popular national parks as motivation for pressuring their respective constituents.

However, most of the impact of the cuts, known colloquially as sequestration, wouldn’t be felt until weeks after the deadline giving both sides more time to reach some manner of bargain or simply prolong the debacle. Markets haven’t been moved by the political leaders’ concern as of yet, perhaps clinging to an ever diminishing hope that a deal will be struck – indeed, as stocks have risen this year and Treasury rates are little changed.

“There is a danger that this is over-hyped,” Steve Bell, senior director of economic policy at the Bipartisan Policy Center and a former Senate Republican budget aide. “Unlike a government shutdown, lights aren’t going to go out the next day. On March 2, virtually everything will be going on as before.”

There’s been no public sign of negotiations between Obama and congressional Republicans. As the administration continued laying out details of how programs used by many Americans would be curtailed, Republican governors joined their congressional delegations in accusing Obama of overplaying his hand and overdramatizing the perils that now face Washington – time will perhaps ultimately tell.

Investors are signaling they view the $15.8 trillion U.S. economy as indeed on solid enough ground to weather the widespread reductions in federal spending. Some solace can be found amongst the Standard & Poor’s 500 index, which sank -1.8% yesterday on news of uncertainty in the Italian election, though is still is up about +4.3% this year. On the other hand, Treasuries maintain yields on 10-year notes trading at about 2.0%, which has stagnated over the last month.

The median forecast of economists surveyed by Bloomberg last week predicted a compromise would be reached in 30 days, resulting in little erosion to growth. Looming even larger than the March 1 start of the automatic spending cuts is a potential government shutdown if Democrats and Republicans can’t agree on a stopgap funding measure by March 27, the date that current government funding expires. Without a deal in Congress that Obama would sign, government spending would halt. The White House also faces a fight when the May 19 expiration of federal borrowing authority approaches. It was the last major battle over the debt ceiling that brought about the sequestration. The $1.2 trillion in across-the-board spending cuts spread over nine years were put in place as part of a 2011 deal to increase the U.S. debt limit.

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