WASHINGTON - The nation's economic policymakers may, at long last, be getting it right.
At least, that conclusion can be drawn from the revised budget and economic forecasts the Clinton administration issued last week. But it remains to be seen whether the long-range growth, low inflation, and low interest rates project by the Office of Management and Budget will come close to reality.
The good news: Professional economists in the private sector have taken a hard look at the OMB numbers and believe they are realistic.
Donald Ratatczak, director of the economic forecasting center at Georgia State University in Atlanta, calls the figures credible. Similar comments come from Robert Giordano, chief economist for Goldman, Sachs & Co., and Bruce Steinberg, head of economic analysis at Merrill Lynch.
The Clinton forecast resulted from months of computer modeling and consulting among officials at the budget office, the President's Council of Economic Advisers, and the Treasury Department.
Clinton is essentially holding out the possibility that the economy will continue to grow modestly through the rest of his term and beyond. During that time, the hope is that the $500 billion deficit reduction plan will be implemented and inflation will not rise above 3 1/2%. Unemployment is expected to decline gradually.
Accordingly, the forecast calls for only a gentle upturn in short-term interest rates. It projects that the rate on 91 -day Treasury bills will rise gradually from 3% to 4.5% by 1997. Long-term rates are expected to stay low, with the 10-year Treasury rate settling in at 5.9%.
These numbers paint a picture of a tight federal budget and an accommodating policy on interest rates by the Federal Reserve. While there is a built-in expectation that at some point the Fed will have to raise short-term rates, it can be argued that rates under the Clinton scenario will still be low by recent historical standards.
The opposite policy mix applied in the 1980s, when big deficits, a hot economy, and a rising tide of consumer and corporate demand for credit forced the Fed to keep rates high. As recently as 1989, short-term rates were at 10%.
"The policy is a lot better mix here," says Ratatczak.
The challenge for Fed officials will be to see if they can nurse a mild expansion without having to raise rates much to curb inflation.
Federal Reserve Board Chairman Alan Greenspan has indicated that new complexities in today's financial markets may require large rate moves. Part of the problem, he said in comments last month at an elite symposium in Jackson Hole, Wyo., is that the Fed does not have as much direct leverage as it used to over the economy.
Fed officials are anxious about the fact that banks supply a smaller share of credit to businesses and consumers than they did in the past. It is through control of bank reserves that the Fed influences short-term rates. But consumers and businesses have found plenty of channels for credit outside the banking system, and deposits are flat as savers pour money into stock and bond funds.
The Fed can still control short-term rates, Greenspan said, but it may take longer "and require larger movements in rates" for a visible impact on U.S. output.
Only time will tell if the administration's prediction of a mild rise in rates turns out to be insightful or wishful thinking. But, in any case, don't hold your breath.
Last week's employment report from the Labor Department sent the yield on the 30-year Treasury bond crashing below 6%, and economists concluded that the Fed will have to retreat from its July threat to raise rates. With new evidence of a sluggish economy, rates won't be going up anytime soon.
