Despite scattered opposition from both ends of the political spectrum, House Republicans and the White House both predicted approval Tuesday for the hard-bargained $38 billion package of spending cuts that narrowly avoided a government shutdown.
House Democratic leaders remained non-committal on the legislation, sealed late last week in negotiations that excluded them.
House Speaker John Boehner, R-Ohio, touted the plan somewhat cautiously, saying it was “far from perfect and we need to do much more if we’re serious about creating new jobs.”
In a posting on his website, Boehner said the measure calls for the largest non-military spending cut in history and would set the stage for a companion vote later in the week on a Republican budget to reduce federal deficits by trillions of dollars over the next decade.
The spending bill covering the rest is fiscal year through Sept. 30 is ticketed for a vote in the House on Thursday, with the Senate to follow either later in the day or on Friday.
The product of days of brinksmanship, the compromise gave the White House, House Republicans and Senate Democrats enough to claim victory yet left critics every opportunity to find fault.
Overall the $38 billion in cuts are less than the $61 billion contained in legislation the House passed in February. Senate Democrats and the White House initially advocated no reduction from current levels.
The legislation includes cuts for the Environmental Protection Agency, the National Institutes of Health, community health centers and the Community Development Block Grant, favored by mayors and other local officials.
Yet the administration and Senate Democrats succeeded in blunting Republican demands for even deeper reductions in those programs and elimination of others. The deal protects some of President Barack Obama’s top priorities, leaving Head Start untouched, for example, while maintaining the maximum Pell education grant of $5,550.
Two prominent conservatives, Rep. Jim Jordan, R-Ohio, and Michele Bachmann, R-Minn., both said they would vote against the legislation.
“I believe voters are asking us to set our sights higher,” said Jordan, who chairs an organization of House conservatives. He said the group, the Republican Study Committee, had called earlier this year for $100 billion in cuts, a total that far exceeds the amount in the legislation.
Bachmann, a potential presidential candidate, said on a campaign-style trip to the first caucus state of the 2012 campaign that she was “very disappointed with the bill that came through payday advance online. And that’s an understatement.”
In an appearance at a high school in Pella, Iowa, she said, “Voters expected us to defund Obama-care,” a reference to the health care law that passed a year ago.
Republicans sought to include provisions that would have effectively voided the year-old health care law, but they were blocked during the negotiations by Obama and Senate Majority Leader Harry Reid, D-Nev.
In addition to the conservative criticism, Sen. Bernie Sanders, I-Vt., one of the most liberal members of the Senate, said the cuts in the measure amount to “Robin Hood in reverse. It takes from struggling working families and gives to multimillionaires. This is obscene.”
Sanders, who is seeking re-election next year, pointed to a reduction in the federal program that helps lower-income families pay their heating bills, and said Pell Grants for college students and the Women, Infant and Children nutrition program would be cut, as well.
Despite the criticism, House Majority Leader Eric Cantor, R-Va., predicted the legislation would pass and said “from every indication I have” support will be strong among the GOP rank and file.
At the White House, spokesman Jay Carney professed no concern about the bill’s prospects. “The deal as I understand it is moving through Congress and will be signed by the president,” he said.
Republicans hold a 241-192 majority in the House, with two vacancies. There are 87 first-term Republicans who will confront an early political test _ whether to support a deal that contains less than they sought and their most avid tea party supporters want.
Democrats have a 51-47 majority in the Senate, although Sanders and Independent Sen. Joseph Lieberman of Connecticut also are aligned with them.
Apart from the spending issues, the negotiators on the legislation also managed a trade-off on non-spending items that complicated the talks.
Included in the bill is a voucher program that lets poor children in the District of Columbia use government funds to attend private schools. Republicans also won agreement to ban the capital city from using its own funds to pay for abortions for poor women.
But they gave up their attempt to block EPA rules on greenhouse gases and other emissions, and were unsuccessful in seeking changes to a federal program that supports family planning.
A state appellate court on Friday denied a request by Missouri’s public counsel and three consumer groups to force utility regulators to roll back electric rates for 1.2 million Ameren customers business card.
Public Counsel Lewis Mills Jr. and the customer groups filed the lawsuit Thursday in the Western District of the Missouri Court of Appeals
OTTAWA
The Republican-controlled U.S. House voted to cut at least $61 billion in federal spending this year, setting up a battle with Democrats over the budget that threatens a government shutdown.
After more than 90 hours of debate, the House decided 235-189 early today to send the measure to the Senate.
Members adopted a number of changes that will make it harder to reach agreement with the Senate, including a ban on funds for President Barack Obama’s health-care overhaul or for Planned Parenthood, which provides abortions. The measure would block regulations on greenhouse-gas emissions, for-profit colleges and the Federal Communications Commission’s “net neutrality” Internet rules.
Senate Democrats already said they won’t accept the steep cuts in the $1.2 trillion spending bill, and Obama’s budget office has threatened a veto. With Congress out of session next week lawmakers have little time to work out their differences. Current spending authority ends March 4, and without a new plan the government will shut down.
House Speaker John Boehner, an Ohio Republican, said this week he won’t accept a short-term extension without some spending reductions. “Read my lips: We’re going to cut spending,” he told reporters.
Military Pay
Minority Leader Nancy Pelosi said a shutdown would halt military pay, veterans’ benefits, Social Security checks and government functions such as food-safety inspections, she said.
“The last thing the American people need is for congressional Republicans or Democrats to draw a line in the sand that hinders keeping the government open,” said Pelosi, a California Democrat.
The plan, designed to fulfill Republican campaign promises to slash federal spending, would kill more than 100 programs and cut funding for hundreds more.
It would make big reductions in programs affecting education, the environment, health care, energy, science and the arts. The Peace Corps budget would be cut by 20 percent and the maximum Pell college tuition grant would be slashed by 15 percent. The Social Security Administration said it would have to furlough employees.
500 Amendments
The House voted on more than 80 amendments among at least 500 offered under Boehner’s promise of an open debate.
An effort by a group of fiscally conservatives to force an additional $22 billion in cuts was defeated, 281- 147, amid warnings from Republicans and Democrats alike that it would force the Federal Bureau of Investigation and other agencies to furlough employees.
“It’s not pleasant to reduce spending — I get that,” said Ohio Republican Jim Jordan, who sponsored the amendment. “This is what the American people elected 87 freshman Republicans to do.” Ninety-two Republicans and 189 Democrats voted against the proposal.
A number of other Republican amendments were adopted, including one accepted 239-187 barring the administration from paying any employees to implement its health-care overhaul.
“Our efforts — and my amendment — will save billions of wasted funding while opening the door for true health-care reform,” said Representative Denny Rehberg, a Montana Republican.
Pre-Existing Conditions
The health-care law aims to expand health-insurance coverage to another 32 million Americans and bars insurers from refusing to cover pre-existing conditions. The law, which cleared Congress last year with no Republican support, also allows young adults to stay on their parents’ insurance plans up to age 26.
“Are you the ones who are going to go tell the American people that insurance companies can drop you when you get sick?” said Democrat Jan Schakowsky of Illinois.
The Education Department amendment, approved 289-136, would block the agency’s “gainful employment” rule that would tie for-profit colleges’ eligibility for federal student aid to their graduates’ income and loan-repayment rates. The administration contends for-profit schools often saddle students with big tuition debts they can’t pay back.
‘Job-Destroying Regulation’
Education and Labor Committee Chairman John Kline, a Minnesota Republican, said Education Secretary Arne Duncan should “put an end to this job-destroying regulation once and for all.”
“Students should be empowered to make an informed decision about their education, and we must ensure they have the information they need without targeting an entire sector of colleges and harming our economy,” Kline said.
The chamber voted 240-185 for Indiana Republican Mike Pence’s amendment to cut off federal funding to Planned Parenthood, which provides a variety of reproductive-health services.
“Congress has taken a stand for millions of Americans who believe their tax dollars should not be used to subsidize the largest abortion provider in America,” he said.
Senator Barbara Boxer, a California Democrat, called it an “extreme attack on women’s health that threatens the health and lives of millions of women.” She said, “We will continue to fight in the Senate against any effort to deprive women of access to lifesaving health care.”
Planned Parenthood receives $363 million in local, state and federal government funding, about 90 percent of it from the federal government or Medicaid, a joint federal-state program, according to spokesman Tait Sye.
Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.
Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.
While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.
“It’s a slow train wreck coming and we all know it’s going to happen,” said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. “It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy.”
The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.
Budget Proposal
That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund.
Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, is scheduled to release his proposed fiscal 2012 budget today as his administration and Congress negotiate boosting the $14.3 trillion debt ceiling.
“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe,” Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”
Yield Forecasts
Treasuries lost 2.67 percent last quarter, even after reinvested interest, and are down 1.54 percent this year, Bank of America Merrill Lynch index data show. Yields rose last week to an average of 2.19 percent for all maturities from 2010’s low of 1.30 percent on Nov. 4.
The yield on benchmark 10-year Treasury note will climb to 4.25 by the end of the second quarter of 2012, from 3.63 percent last week, according to the median estimate of 51 economists and strategists surveyed by Bloomberg News. The rate was 3.64 percent as of 2:08 p.m. today in Tokyo. The economy will grow 3.2 percent in 2011, the fastest pace since 2004, according to another poll.
“People are starting to come to the conclusion that you’ve got a self-sustaining recovery going on here,” said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. “When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket. Every day that we don’t address this in a meaningful way it gets more and more dangerous.”
‘Kind of Disruption’
While yields on the benchmark 10-year note are up, they remain below the average of 4.14 percent over the past decade as Europe’s debt crisis bolsters investor demand for safer assets, Bank of America Merrill Lynch index data show.
“The market is still giving the U.S. government the benefit of the doubt,” said Eric Pellicciaro, New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. “What we’re concerned with is whether the budget will only be corrected after the market has tested them. Will we need some kind of disruption within the bond market before they’ll actually do anything.”
Still, U.S. spending on debt service accounts for 1.7 percent of its GDP compared with 2.5 percent for Germany, 2.6 percent for the United Kingdom and a median of 1.2 percent for AAA rated sovereign issuers, according to a study by Standard & Poor’s published Dec. 24. Among AA rated nations, China’s ratio is 0.4 percent, while Japan’s is 2.9 percent, and for BBB rated countries, Mexico devotes 1.7 percent of its output to debt service and Brazil 5.2 percent, the report shows.
Auction Demand
Demand for Treasuries remains close to record levels at government debt auctions. Investors bid $3.04 for each dollar of bonds sold in the government’s $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg. Indirect bidders, a group that includes foreign central banks, bought a record 71 percent, or $17 billion of the $24 billion in 10-year notes offered on Feb. 9.
Foreign holdings of Treasuries have increased 18 percent to $4.35 trillion through November. China, the largest overseas holder, has increased its stake by 0.1 percent to $895.6 billion, and Japan, the second largest, boosted its by 14.6 percent to $877.2 billion.
‘Killing Itself’
“China cannot dump Treasuries without killing itself,” said Michael Cheah, who oversees $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “They’re holding Treasuries as a means to an end,” said Cheah, who worked at the Singapore Monetary Authority from 1982 through 1999, and now teaches finance classes at New York University and at Chinese universities. “It’s part of what’s needed to promote exports.”
At least some of the increase in interest expense is related to an effort by the Treasury to extend the average maturity of its debt when rates are relatively low by selling more long-term bonds, which have higher yields than short-term notes. The average life of the U.S. debt is 59 months, up from 49.4 months in March 2009. That was the lowest since 1984.
The U.S. produced four budget surpluses from 1998 through 2001, the first since 1969, as the expanding economy, declining rates and a boom in stock prices combined to swell tax receipts.
Tax cuts in 2001 and 2003, the strain of the Sept. 11 terror attacks, the cost of funding wars in Afghanistan and Iraq, the collapse in home prices and the subsequent recession and financial crisis has led to the three largest deficits in dollar terms on record, totaling $3.17 trillion the past three years.
‘Demonstrates Confidence’
The U.S. needs to manage its spending decisions “in a way that demonstrates confidence to investors so we can bring down our long-term fiscal deficits, because if we don’t do that, it’s going to hurt future growth,” Treasury Secretary Timothy F. Geithner said in Washington on Feb. 9.
The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, expressed concern in the Feb. 1 report that the U.S. is exposing itself to the risk that demand erodes unless it cultivates more domestic demand.
“A more diversified debt holder base would prepare the Treasury for a potential decline in foreign participation,” the report said.
Foreign investors held 49.7 percent of the $8.75 trillion of public Treasury debt outstanding as of November, down from as high as 55.7 percent in April 2008 after the collapse of Bear Stearns Cos., according to Treasury data.
Potential Demand
The committee projects there may be $2.4 trillion in latent demand for Treasuries from banks, insurance companies and pension funds as well as individual investors. New securities with maturities as long as 100 years, as well as callable Treasuries or bonds whose principal is linked to the growth of the economy might entice potential lenders, the report said.
“They are opening up a can of worms with the idea of all these other instruments,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They should try to keep the Treasury issuance as simple as possible. The more issuance you have in particular issue, the more people will trade them — whether it be domestic or foreign investors.”
White House Budget Director Jacob Lew said the Obama administration’s 2012 budget would save $1.1 trillion over the next 10 years by cutting programs to rein in a deficit that may reach a record $1.5 trillion this year.
“We have to start living within our means,” Lew said yesterday on CNN’s “State of the Union” program.
Still, about $4.5 trillion, or 63 percent of the $7.2 trillion in public Treasury coupon debt, needs to be refinanced by 2016. That gives the government a narrowing window as growing interest expense will curtail its ability to spend.
“There is roll-over risk,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. “It’s a vicious cycle.”
BOSTON
The euro extended its rally Friday to near six-month highs after the currency’s chief rate-setter warned about inflation, while stocks were hurt by a weak U.S. jobs report and China’s move to tighten lending.
The euro rose to $1.3367, up 0.5 percent on the day, consolidating a surge sparked by European President Jean-Claude Trichet’s comments that inflation risks had risen and that economic data were better than expected. The prospect of higher interest rates _ even months away _ tends to boost a currency.
A disappointing U.S. labor report weighed on markets somewhat, however, a day after successful eurozone bond auctions helped restore some confidence in Europe. Adding to the negative sentiment, China’s central bank on Friday raised the amount of money that banks must keep on reserve for the seventh time in a year, an attempt to counter inflation and cool off growth.
“Although the week could have been catastrophic had the news from Portugal, Spain and Italy not been quite as upbeat, the air of caution that’s settling in is certainly warranted,” IG Markets Ben Potter said.
The major European indexes were all trading down at midday Friday. Britain’s FTSE was 0.86 percent lower at 5,971.95 and Germany’s DAX was down by 0.36 percent to 7,049.84. The CAC-40 in Paris shed 0.37 percent to 3,906.09.
Wall Street was set to open down slightly ahead of the release of key economic data, including retail sales and consumer prices for December and earnings from companies like JP Morgan Chase. Dow futures were down 0.02 percent at 11,681 while the broader S&P 500 futures were down 0.2 percent to 1,278.80.
Oil prices fell to $90.42 a barrel as traders weighed whether demand in a slowly recovering U.S. economy will be enough to push crude above $100 soon. The dollar was up also against the yen at 82.86.
Japan’s Nikkei 225 stock average closed down 0.9 percent at 10,499.04 after Prime Minister Naoto Kan’s Cabinet resigned en masse and a new government was put in place in a bid to revive the economy.
Investors were taking profits after the Nikkei closed at an eight-month high on Thursday, and the dollar’s fall under the 83-yen line hurt exporters.
South Korea’s Kospi rose 0.9 percent to 2,108.17, the third time this week that it has reached a record high.
Australia’s S&P/ASX 200 gained 0.1 percent to 4,801.50 and benchmarks in India and the Philippines also rose. Indexes in Taiwan, Singapore and New Zealand fell.
Chinese shares closed lower before the central bank announced it had raised its reserve requirements.
Mindful of the political turmoil linked to past bouts of inflation, Beijing is trying to curb a flood of money in the world’s second largest economy following a lending spree triggered by stimulus aimed at fighting the global financial crisis.
The benchmark Shanghai Composite Index fell 1.3 percent to 2,791.34, while the Shenzhen Composite Index of China’s smaller, second exchange tumbled nearly 2 percent to 1,232.73.
Analysts in the region were careful not to read too much into Wall Street’s lackluster performance from the day before. Asian markets don’t always follow trends in other regions, said Kwong Man Bun, chief operating officer at KGI Asia Ltd. in Hong Kong, where the Hang Seng index in Hong Kong was up 0.2 percent.
“Liquidity is quite abundant in Hong Kong,” Kwong said. “The Hang Seng will reach 25,000 before the Chinese New Year.” In addition, fears were easing over Europe’s debt crisis and China’s monetary tightening.
“That’s why we have seen increasing fund inflows into Hong Kong,” he said.
In New York on Thursday, stocks retreated after a report found that more people applied for unemployment benefits last week. The U.S. Labor Department said first-time applications for unemployment benefits rose 35,000 from the week before to 445,000. It was the highest level since October and above what economists had predicted.
The Dow Jones industrial average fell 0.2 percent while the broader Standard and Poor’s 500 lost 0.2 percent.
Reserve Bank of Australia Governor Glenn Stevens can glimpse the inflation threat he faces from the nation’s floods at the produce shop near his suburban Sydney home in Sylvania Waters.
Tomato prices soared 20 percent in the past week and bananas, grapes and sweet potatoes are up 10 percent, said Maurice Sorace, owner of Sylvania Best Fresh, who gets about a third of his fruit and vegetables from flood-ravaged Queensland state. “Prices will be higher in the next week” as the deluge drowns more crops and clogs roads, he said.
The crisis may force the RBA to accept higher inflation in coming months as the floods spur food and commodity costs and slow growth in a disaster zone the size of Egypt. Australian inflation-linked bonds yesterday rallied the most in more than a year as the damage, along with future rebuilding in a country already near full employment, risked stoking consumer prices.
“At a time when the economy does not have a lot of spare capacity and a mining and energy-investment boom is also expected over the next few years, the RBA will face an even greater challenge to manage medium-term inflation pressures,” said Paul Brennan, an economist at Citigroup Inc. in Sydney.
The river that bisects the Queensland state capital, Brisbane, burst its banks, threatening thousands of properties and inundating parts of the nation’s third-biggest city. A torrent of brown water filled with shattered pontoons, trees and boats broken from moorings, the Brisbane River is forecast to peak today.
Bigger Impact
“Now the floods are urban, much greater damage to infrastructure is likely,” Roland Randall, an economist at TD Securities Inc. in Singapore, said in a note to clients yesterday. “We have pushed out our expectation for the RBA to resume tightening monetary policy to April or May” from a previous call of March, he wrote.
As the water crests, investors are increasing bets that price gains will accelerate. The extra yield of Australian inflation-linked bonds maturing in five years compared with nominal five-year government debt — a gauge of the inflation investors expect over the period — yesterday reached an eight- month high of 2.92 percentage points.
The rain that closed coal mines and cut railways also drove the Australian dollar down to a one-month low versus its U.S. counterpart on concern the floods will slow growth.
Hit to GDP
The cost to the nation may total as much as A$13 billion ($12.9 billion), or 1 percent of gross domestic product, said Stephen Walters, chief economist for Australia at JPMorgan Chase & Co. in Sydney, who has changed his forecast for the next rate rise to May from February. RBA board member Warwick McKibbin said such a hit to GDP “is not out of the question,” the Sydney Morning Herald reported yesterday.
Much of the economic damage assessment is incomplete. The Port of Brisbane remained closed yesterday and all ships were directed out of the harbor, which lies 24 kilometers (15 miles) from the city’s central business district, as debris littered the waterway guaranteed payday loans.
Mining companies including Rio Tinto Group, BHP Billiton Ltd. and Xstrata Plc have deferred deliveries of coal, driving up the price for steelmaking and power coal. Thermal coal prices have already risen to the highest since September 2008.
Cattle Prices
Cattle prices in Australia, the second-largest beef exporter, jumped to near a record. The Eastern Young Cattle Indicator, which measures prices at sales, gained to A$4.108 per kilogram yesterday, reaching the highest level since October 2005, Tim McRae, economist at Sydney-based Meat & Livestock Australia said.
Once Stevens does resume raising rates, the rise in borrowing cost would pose an additional burden on farmers and homeowners with floating-rate debt, after the RBA already boosted rates faster than any Group of 20 nation since the end of the crisis.
Stevens has a mandate to keep inflation in a range of 2 percent to 3 percent. In July to September, the consumer price index rose at a quarterly pace of 0.7 percent. It may rise 1.2 percent in the first quarter of this year, according to the median of six estimates in a Bloomberg News survey, compared with a pre-flood estimate of 0.9 percent.
Inflation Outlook
The projected pace would be the fastest since the third quarter of 2008, when the RBA’s cash rate target was at 7.25 percent, compared with its current level of 4.75 percent.
GDP growth in the first three months this year will be half as high as the pre-flood forecast, at 0.4 percent, a survey of seven economists showed.
The reconstruction efforts may suffer from skill shortages already straining mining operations, threatening to push up wages for some workers.
Australian employers probably added 25,000 workers in December from a month earlier and the jobless rate likely declined to 5.1 percent from 5.2 percent, according to the median estimate of 17 economists surveyed by Bloomberg News before an employment report released today.
Bank of America Merrill Lynch economists said the RBA would resume raising rates “from the middle of the year, assuming that weather normalizes in about April.”
After three decades in the business, Toronto real estate broker Paul Swartz is still trying to figure out the market.
Stocks are ending mixed after reports showed small improvements in consumer spending and the job market.
The government reported Thursday that consumer spending rose 0.4 percent in November from the month before. That was slightly below expectations of a 0.5 percent gain.
Separately, the Labor Department said the number of people applying for unemployment benefits fell last week to 420,000.
The Dow Jones industrial average rose 14 points, or 0 .1 percent, to 11,573. The S&P 500 index fell 2, or 0.2 percent, to 1,256. The Nasdaq composite index fell 6, or 0.2 percent, to 2,665.
Falling stocks outpaced rising ones by a small margin on the New York Stock Exchange. Volume was a light 613 million shares on the last trading day before the Christmas holiday.
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