First published on January 3, 2013 via email newsletter 'Fiscal Cliff Notes.'

The 113th Congress is sworn in today with Republicans in control of the House with 234 Members (Democrats have 201). Democrats control the Senate with 55 Members (two Independents will caucus with the majority).

The new House Republican Conference is blunter than their predecessors in the 112th with an enhanced threat of 2014 primary election challenges given the Fiscal Cliff vote in the waning hours of the 112th.

The Fiscal Cliff resolution was as expected, a short-term fix with some permanent characteristics on tax rates. The only political surprise was Speaker John Boehner (R-OH) allowing a vote on the Senate package without amendments and thus allowing passage without a majority of the majority. Speaker Boehner is weakened substantially but will be reelected today as Speaker and as capable of controlling his conference in the 113th as he was in the 112th; primarily due to the will and skill of Majority Leader Eric Cantor (R-VA).

The first two months of the 113th House will be rife with more of the conflict that defined the 112th. While the Fiscal Cliff deal averted immediate downside impact on the economy (the defense sector won a reprieve with the delay of sequester cuts but the cliff still looms) assume more political brinksmanship around the sequester debate that will certainly involve defense and discretionary spending levels and entitlement reform.

Senate Republicans are vocal in their readiness to use the expiring debt ceiling and sequester (March 1st) and continuing budget resolution (March 27th) as leverage to win concessions on spending and entitlements. Given the resolve of Senate GOPers to use the debt ceiling for leverage and the rowdiness of the GOP House Conference the potential for a downgrade of America’s credit rating is very real.

Senate Minority Leader Mitch McConnell (R-KY) has already voiced the need to begin the sequester and debt ceiling debate immediately. Senate Majority Leader Harry Reid (D-NV) will likely respond by adjourning for two weeks after swearing-in ceremonies today, thus extending the first day indicating that the first matter of business to be taken up by the new Senate will be rules reform (i.e. Rule 22/filibuster reform). Assume that little to nothing will be accomplished in the Senate’s first two weeks.

There’s a lot of work to be done by House Republicans currently wary to engage the White House on sequester and budget. A destabilized Speaker Boehner will be unwilling to discuss new tax revenue to accompany spending cuts, as will his Senate Republican colleagues. The next phase of the Fiscal Cliff negotiations will be more dramatic than the last.

Despite appeals to negotiate meaningful spending and entitlement reform, there isn’t likely to be any major deal heading toward March. President Obama is sticking firmly to his position that he will not negotiate on the debt ceiling and the GOP wants that to be the vehicle for more cuts. While the White House will be hard-pressed to achieve higher rates, it can insist on more revenue that the GOP is willing to do in context of comprehensive reform. A fairy tale ending is not anticipated and markets will be unsettled by continued dysfunction.