The gloomy political outlook came on the same day Federal Reserve Chairman Ben S. Bernanke warned that Fed monetary stimulus can't offset the full impact of higher taxes for all earners and slashed federal spending, and that doubts about the White House and Congress reaching a deal are having a chilling effect on the economy.

"It's already affecting business and hiring decisions by creating uncertainty," Bernanke, who popularized the term "fiscal cliff" to describe the deadline for action, said at a news conference. "Clearly this is a major risk factor."

U.S. stocks erased gains as optimism about Federal Reserve plans to buy more bonds faded and investor focus returned to the threat of a budget deadlock.

The Standard & Poor's 500 Index rose less than 0.1 percent to 1,428.48 at the market close yesterday in New York, erasing an earlier rally of as much as 0.8 percent. The Dow Jones Industrial Average slipped 2.99 points, or less than 0.1 percent, to close at 13,245.45.

"People finally realized that we still have the fiscal cliff waiting in the wings," Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said in an e-mail.

The benchmark 10-year Treasury bond yield was little changed at 1.7 percent at 7:59 a.m. today New York time. Yesterday the yield touched 1.71 percent, the highest since Nov. 7.

While administration officials said that both sides are in contact and talking, they remain hundreds of billions of dollars apart on taxes and spending. They also continue to disagree on whether a year-end deal should include an increase in the debt limit and stimulus measures to boost the economy.

Trading Blame

Democrats say Boehner's unwillingness to let income tax rates increase for the top two percent of earners is hampering an agreement, while Republicans blame Obama's refusal to offer additional spending cuts to programs like Medicare.

Obama this week reduced his demand for new tax revenue to $1.4 trillion from $1.6 trillion. Even still, Boehner said the plan wouldn't pass the Republican-controlled House.

"We've got some serious differences," Boehner told reporters, after what he described as a "frank" conversation with the president on Dec. 11.

Republicans said their offer on taxes remained largely unchanged from last week. Though they oppose raising rates, Boehner has offered to raise $800 billion in revenue by limiting deductions and other breaks for wealthy taxpayers.

White House press secretary Jay Carney said the president will hold firm on his insistence that the tax rates for top earners must rise. He dismissed the Republican argument that their proposal could raise enough revenue to help close the deficit without the increase.

"Those magic beans are just beans, and that fairy dust is just dust," he said. "It is not serious."

Senator Jim DeMint, a South Carolina Republican who is stepping down early next month to head the Heritage Foundation, a conservative think tank in Washington, said today that Obama will "probably get his tax increases one way or another."

"We're going to be raising taxes not just on the top earners," he said on CBS's "This Morning" program. "Everyone's going to pay more taxes next year."

DeMint, a businessman most of his life, said that economic uncertainty because of the protracted debate over spending cuts and tax increases means "you're already going to see some downturn in our economy, because of what's going on here."

"We can't fix it Christmas Eve and expect it all to bounce back in January," he said.

Compromise Sought

Business leaders kept up pressure for a compromise. Valerie Jarrett, a senior adviser to Obama, met with financial services executives, including Daniel Och, chief executive of Och-Ziff Capital Management; Stefan M. Selig, executive vice chairman of global corporate and investment banking at Bank of America/Merrill Lynch; and Jonathan D. Gray, global head of real estate at Blackstone Group Management LLC.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. economy would thrive next year if lawmakers come up with a deal.

"You might have a booming economy in a couple of months," with economic growth accelerating to 4 percent rather than 2 percent, Dimon said yesterday at a conference in New York hosted by the New York Times's DealBook.

Administration officials and Democratic lawmakers argue they have the upper hand in negotiations because Obama won re-election on a promise to increase taxes on the top earning Americans. That view is backed by polls.

Sixty-five percent of Americans say Obama has a mandate for his stance, according to a Bloomberg National Poll of 1,000 adults conducted Dec. 7-10. Majorities of about 2-to-1 also see the election results as an endorsement of Obama's pledge to protect Social Security and Medicare benefits.

Republicans are demanding cuts in entitlement programs as part of a deal. In a Dec. 11 interview with ABC News, Obama signaled some flexibility. "The current path is not sustainable because we've got an aging population and health care costs are shooting up so quickly," he said.

Tiberi accused the president of offering public promises of entitlement changes to get support while withholding those pledges in negotiations.

"They're less flexible privately than they are publicly," Tiberi said.

Leaders on both sides said reaching a deal this month remains possible, though probably not before the Christmas holiday, when Congress usually goes on recess and Obama heads for his home state of Hawaii.

Members of the White House staff were urged not to buy non-refundable tickets home. Boehner told Republican lawmakers in a closed-door meeting that votes may come in the final days of December, warning them not to leave the capital for an extended period.

"It's going to be a long December," said Representative Doc Hastings, a Washington Republican.

Bloomberg News

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