The U.S. is bracing for the end of the year, when tax cuts are set to expire and automatic spending cuts kick in at the same time, a combination dubbed by Wall Street as a fiscal cliff that could suck hundreds of billions of dollars out of the economy and offset growth.
That's not likely going to happen, says Jerry Webman, chief economist at Oppenheimer Funds.
Fears are brewing that partisan bickering that slowed up lifting the debt ceiling in 2011 are going to return this year, an election year, and will inflict more damage on the economy by hampering progress on extending tax breaks.
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Yes, tax hikes could arguably be in store almost everyone, while spending cuts could do away with government programs that could cost jobs.
But have some faith in lawmakers to work out a compromise.
"I think it's going to be more like a downward slope than a sudden cliff. It's not going to be a road-runner moment," Webman tells Moneynews.TV.
"I think they will probably do is work out a series of compromises so that we probably will see some fiscal tightening in 2013, but I think it's going to be more gradual than some people estimate, that this is a hit of some $500 billion just starting to hit us right on January 2. I think they'll work out something but I do think that there is going to be some fiscal drag next year," adds Webman, author of "MoneyShift: How to Prosper from What You Can't Control."
Economic recovery remains choppy and sluggish, and the economy can't handle such fiscal shocks.
Meanwhile, more Federal Reserve members favor rolling out a fresh round of monetary stimulus should recovery hint at slowing, according to the minutes of the U.S. central bank's latest monetary policy meeting.
"Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough," the Federal Reserve minutes read.
Monetary easing typically involves the Fed buying assets from banks, injecting the economy with liquidity to keep long-term interest low and encourage investment and hiring.
The dollar weakens as a side effect, while stock prices rise.
Despite such dovish comments coming out of the Fed, the U.S. central bank will probably remain on standby, neither rushing to stimulate the economy nor to tighten either, Webman says.
"I think it's neither of those things. I think the Federal Reserve has done a pretty good job of managing the crisis of the past years. If I were advising them I would say 'let's stay on hold and see what happens for a while,'" Webman says.
"I would be reluctant to see the Fed either start tightening right away or lead us to think that they are adding a lot more stimulus. It would be nice to think they would sit back and let the situation evolve as an economy should evolve."
Meanwhile investors need to avoid herd mentality amid such uncertainty that often roils markets.
While the fate of the U.S. recovery remains in constant doubt, the outlook for Europe remains cloudier, with debt-ridden Greece teetering on the brink of abandoning the euro.
Lately investors have traded on headlines and economic indicators, ditching safe-haven dollar positions and rushing to riskier equities or higher-yielding currencies when indicators surprise only to reverse those trades when they disappoint.
Be careful, Webman says, as a flight-from-risk strategy for one investor might not be the best the best for another.
"We've heard a lot in the last couple of years about risk-on and risk-off, everybody wants to take risk and then they want to run away from risk. We're suggesting to people that they think about what risks they can afford to take and then how they can match the amount of risk they can afford to take with investment opportunities that are consistent with those risks," Webman says.
"Sometimes it means not being so complicated and really coming back to investment basics. How do you make money, who's making money and how can we participate in it?"
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