WASHINGTON -- The Clinton Administration said yesterday that interest rates are turning out to be higher than officials expected at the start of the year, but are not likely to detail the expansion.
"We have a growing economy that's producing jobs," said Treasury Secretary Lloyd Bentsen at a White House briefing that was also attended by other senior administration officials.
The officials met with reporters to unveil the administration's revised economic forecast, which serves as a basis for the mid-session budget review.
Bentsen also said the administration supports "a stronger dollar" and remains in agreement with the Federal Reserve on fostering a sustained expansion with low inflation.
The revised administration forecast says three-month Treasury bills will have an average rate of 4% in 1994, rising to 4.7% in 1995. The projections are much higher than those of 3.4% in 1994 and 3.8% in 1995 that were presented in the January budget.
In trading yesterday, three-month bills were quoted at nearly 4.40%. Laura D'Andrea Tyson, head of the President's Council of Economic Advisers, said that if bills stay at 4.4% for the rest of the year, the average rate for the year would still turn out to be 4% and meet the administration's forecast.
Many analysts are expecting bill rates to rise further, perhaps hitting 5% by yearend, as the Fed tightens credit once or twice. "I think the bill forecast is a little bit on the low side, but it's not outlandishly low," said David Greenlaw, an economist with Morgan Stanley & Co.
On long-term rates, the administration forecast said 10-year notes will have an average rate of 6.8% in 1994 and 7% in 1995, up from the estimate of 5.8% issued in January for both years.
Bentsen attributed the higher rates in the administration's forecast to stronger economic growth, rising demand for credit in the United States and abroad, and the Fed's policy of tightening rates.
Robert Dederick, chief economist for Northern Trust Co., said the projections for short-term rates seem to indicate that the administration expects the Fed to tighten credit by raising the federal funds rate by 25 basis points to 4.50% in 1994, and by 50 basis points to 5% in 1995.
For the economy as a whole, the forecast calls for gross domestic product to rise 3% this year and 2.7% in 1995, the same figures issued in January. That would represent a mild deceleration from the strong growth over the past six months that stirred bond market fears of an overheating economy.
Officials left their January inflation forecast unchanged, predicting the consumer price index will go up 3% in 1994 and 3.2% in 1995.
Tyson pointed out that the forecast contains estimates that are close to those issued by private economists, such as those in the Blue Chip survey. "We are committed to a realistic, credible forecasting approach," she said.
Private economists agreed that the numbers seemed reasonable, except for the short-term interest rates. "This administration has made a point of producing credible forecasts," said Dederick.
On Tuesday, the administration released revised budget projections that put the deficit at $220 billion in fiscal 1994, down $15 billion from the February estimate. In fiscal 1995 the deficit is projected to fall to $167 billion from the original $176 billion estimate.
Alice Rivlin, incoming director of the Office of Management and Budget, said one of the major factors contributing to the lower federal budget was higher tax receipts resulting from continued strong economic growth.
Medicaid expenses have also not grown as rapidly as originally projected, Rivlin said. The government will spend about $46 billion less than expected on Medicaid through fiscal 1999, she said.
While Rivlin said that most of the revisions in the mid-session budget review were positive, she said higher interest rates will force the government to pay $101 billion more in interest payments on the national debt from fiscal 1994 through fiscal 1999.
"The deficit problem is obviously still with us," Rivlin said. She reiterated the administration's call for a health care reform package that includes cost controls, as well as cuts in discretionary spending.
"Beyond that we must look at the entitlement programs" and the money that can be saved there, Rivlin said. A bipartisan commission established last year by the administration to study entitlement reform is scheduled to release its report in December.
