The cuts aren't expected to come right away, and experts expect agencies to do all they can to delay them.
Beyond the big news out of Washington, investors will get a feel for the U.S. economy's health throughout the week.
The second estimate of U.S. gross domestic product for the fourth quarter of 2012 is due out on Thursday. The first estimate showed that GDP, the broadest measure of the nation's economic growth, contracted for the first time in more than three years as the government cut spending and businesses drew down inventory.
The economic health of Americans will also be in focus, with consumer confidence, auto sales and Michigan sentiment due out throughout the week. It's been a tough start to the year for consumers, as the payroll tax, higher gas prices and a delay in income tax refunds have simultaneously been hitting wallets.
A survey of shoppers conducted by the National Retail Federation found that three-quarters of respondents were cutting back to cope with the tax changes this year. Half of the people polled said they planned to spend less on overall purchases, about a third said they would reduce dining out, while about a quarter said they would reduce entertainment, vacation and travel plans.
Wal-Mart(WMT), the nation's largest retailer, said its sales slowed in late January and early February because shoppers were feeling the pain.
Investors will get to see if other retailers were seeing the same pattern. So far, many retailers have reported healthy sales in January, a sign that not all consumers may be worried about higher taxes and a still stagnant economy just yet.
Several retailers will also report corporate earnings this week, including Macy's(M), Home Depot,(HD)Best Buy,(BBY)Kohls(KSS), Barnes & Noble(BKS) and Gap Inc(GPS).