The largest U.S. financial firms warned Thursday of dire consequences if Washington fails to head off year-end tax hikes and spending cuts, saying they could jolt the economy into recession and prompt a new and dangerous downgrade of the U.S. credit rating.
These projections come as U.S. business leaders have been escalating their lobbying on behalf of a bipartisan deal to avoid the “fiscal cliff,” pressing their case in a series of meetings with key members of Congress.
The Washington Post’s Ed O’Keefe explains the buzz word that everyone has been using to identify the financial changes looming at the end of the fiscal year.
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On Thursday, 15 of the nation’s largest financial companies warned President Obama and Congress in a letter that interest rates could spike significantly if policymakers do not agree to stop the series of automatic tax hikes and spending cuts and replace them with a long-term plan to tame the federal debt.
In an interview, JPMorgan Chase chief executive Jamie Dimon said he would use all the power he has as head of the country’s largest bank to press lawmakers for a solution. Dimon is a major backer of a Washington-based campaign known as “Fix the Debt,” which is planning to spend $30 million to pressure lawmakers.
“I will do whatever it takes,” he said.
The White House and congressional Republicans now appear ready to play chicken over the “fiscal cliff.” Administration officials say the president is prepared to veto legislation to block the tax hikes and spending cuts unless Republicans agree to increase tax rates on the wealthy, a red line for many GOP lawmakers.
On Thursday, analysts at JPMorgan said economic activity will be weaker than expected in the first part of next year because lawmakers are unlikely to renew the payroll tax cut, which has provided the average family with $1,000 a year in additional income.
“The change in our view wasn’t because of something that happened, but rather what didn’t happen,” analysts wrote in a research note. “Few in the political establishment came forward to push an extension of this tax break.”
If no agreement is reached, a variety of other taxes, affecting all Americans, will increase significantly on Jan. 1, and the government will begin to make deep cuts to domestic and defense spending. Many economists say that will cause a recession.
Also on Thursday, a top executive for the country’s largest bond firm, Pimco, warned that ratings companies would probably lower the credit rating on U.S. government securities after the new year.
“The U.S. will get downgraded; it’s a question of when,” Scott Mather, Pimco’s head of global portfolio management, said at a conference in Wellington, New Zealand, according to Bloomberg News. “It depends on what the end of the year looks like, but it could be fairly soon after that.”
Standard & Poor’s downgraded U.S. debt last summer. That action had little effect on global investors at the time. But a second credit-rating firm — Moody’s — has warned it could take similar action if lawmakers do not replace the “fiscal cliff” with a long-term plan to tame the debt.
“Another downgrade of our nation’s debt by a major rating service . . . could lead to significantly higher interest rates,” the financial services executives wrote in their letter Thursday. “Higher interest payments would worsen our nation’s fiscal burden and likely increase uncertainty and instability in global financial markets.”
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