Barack Obama 'modestly optimistic' of fiscal cliff deal "The average investor - indeed, the average citizen - would like to see Congress pivot to long-term co-operative solutions, and away from continuous bickering and recurrent dithering," said Mohamed El-Erian, the chief executive of Pimco, the world's largest bond investor. Should all the tax increases and roughly $100bn of spending cuts - which also take effect from January - be allowed to happen, most economists fear the US will plunge back into recession in the first quarter of 2013. The cautious confidence from President Obama was echoed by Mitch McConnell, the leader of the Republicans in the Senate, and Harry Reid, who heads the majority Democratic faction. The two men said they will work over the next 24 hours to reach a deal that the Senate can vote on on Sunday. Should a deal pass the Senate, it would then need to be voted on by the Republican-controlled House of Representatives. A last-ditch accord will need both sides to reach a compromise on which Americans should pay higher taxes next year, after reductions first introduced by George W Bush expire on Monday. Tax rates are proving the toughest sticking point between Republicans and Democrats, with the former insisting that only those households with annual income above $1m should have to pay more. Although investors are braced for a stomach-churning day on Monday, economists say the potential economic damage could be limited should the deadline lapse. Those politicians who were elected to Congress in November take office on January 3, and the new Congress is expected to quickly strike a deal on the fiscal cliff if the current incumbents fail. However, the longer the stalemate lasts, the greater the damage that will be inflicted on consumers and businesses. "The longer our politicians maintain their extreme polarisation and paralysis, the greater the impact on consumer confidence and on the willingness of companies to invest," said Mr El-Erian. The Dow Jones Industrial Average closed down 1.2pc at 12,938.10 on Wall Street. The FTSE 100 earlier finished 0.5pc lower at 5,925.37.