The United States was warned Wednesday that its chaotic budget politics could lead to a new credit downgrade as the country readied for the impact of steep automatic spending cuts that begin in two days.
Fitch Ratings said Washington could lose its top-flight AAA credit rating, not because of the implementation of $85 billion in an austere "sequester," but because deficit policy battles are undermining confidence in the government.
It pointed to the next fight, over a new six-month spending plan that if not agreed by the end of March by warring Democrats and Republicans could force a shutdown of the government in April.
"Implementation of the automatic spending cuts -- the sequester -- and a government shutdown would not prompt a negative rating action," Fitch said..
"But such an outcome would further erode confidence that timely agreement will be reached on additional deficit-reduction measures necessary to secure the 'AAA' rating."
Politicians appear resigned to the sequester cuts that begin from March 1, forcing heavy pullbacks in government spending on defense and other areas.
But markets shrugged it off, as stocks pushed higher for the third straight day and the Dow Jones Industrial Average jumped 1.3 percent to its best finish in more than five years -- at 14,075.37, it was its third highest ever close.
"The recognition is that the economy will continue to expand in 2013 and 2014, said Hugh Johnson of Hugh Johnson Advisors.
"Investors do not believe that it will lead to a recession, and that wasn't true for the fiscal cliff," he said, referring to earlier cuts and tax hikes that had been set to start on January 1, before a political deal modified them.
Economists, including Federal Reserve chief Ben Bernanke, say the sequester could trim another 0.5 percentage point or more from US growth this year.
The White House has warned of a "perfect storm" of furloughs for workers, nationwide airport delays and less secure US borders, and says pre-school programs could be canceled, teachers laid off and public services curtailed.
Alice Rivlin, a Brookings Institution economist and formerly a top government budget expert, said the sequester cuts will "endanger the economic recovery that is finally picking up speed."