The so-called fiscal cliff was a noted concern when the Federal Open Market Committee (FOMC) met in April according to minutes released in May. Expiration of the Bush-era tax cuts, the payroll tax cuts, and $1 trillion in spending cuts is scheduled to occur January 1 of 2013. The concern is that the combination of these fiscal elements could throw the economy back into recession.
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The fiscal cliff scenario plays right into concerns about the budget. If a budget agreement doesn’t happen before the current laws expire, money could suddenly become tighter. That could start a domino effect that could derail the creation of new jobs, severely affecting the employment picture.
The Fed seems to be less than confident of its projections for future growth, primarily because recent predictions have not been confirmed by economic data. Although the Fed feels the recovery is continuing, the pace is slow and there are enough disappointing reports to keep investors cautious and the Fed on guard.