WASHINGTON -- The Clinton administration yesterday slashed its forecasts for short-term and long-term interest rates and said it is hopeful rates will stay low as the economy grows moderately over the next five years.
The optimistic assessment, which does not see rates on 10-year Treasury notes rising above 6%, is contained in the Office of Management and Budget's mid-session review.
The report updates the economic and budget estimates released by the administration in April. Officials delayed release of the report to take into account enactment of President Bill Clinton's $500 billion deficit reduction package.
As expected, the revised forecast acknowledges that the economy will not perform as well as administration officials were hoping earlier in the year. It projects gross domestic product will rise only 2.0% in 1993, instead of the 3.1% increase issued in April.
But administration officials stressed that they believe the economy will pick up steam and record growth of 3% in the second half of this year and again in 1994. In the following three years, the call is for mild growth in the range of 2.6% to 2.7%, which officials said will help keep a lid on inflation and prevent long-term rates from rising.
"We have gone for a cautious forecast over these years," said Laura D'Andrea Tyson, head of the President's Council of Economic Advisers.
Many analysts say the President's economic plan played a major role in this year's spectacular bond market rally. The yield on the Treasury's 30-year long bond has tumbled from 7.5% in mid-January, just before Clinton's inauguration, to slightly more than 6%.
Some market participants credit the President's plan for successfully scaling back government borrowing, while others stress that the tax increases coming on line will slow the economy and reduce inflationary pressures.
But the OMB report says the financial markets are giving the President's plan a thumbs-up that will help keep rates down for a long time. "Because of the credibility of the plan in financial markets, and the President's determination to clean the nation's financial house in the first days of his administration, we can expect that interest rates will remain low," the report says.
The revised forecasts project that 91-day Treasury bills this year will have an average rate of 3.1%, down from the 3.7% rise projected, in April. Rates are then projected to rise modestly, going to 3.6% in 1994, 3.9% in 1995, 4.2% in 1996, and 4.5% in 1997 and 1998.
The average rate for the 10-year Treasury note this year is estimated to be 6.0%, down from the 6.7% gain issued earlier. For 1994 through 1998, the rate is projected to stay at 5.9%. By contrast, many private forecasters say long rates will rise in coming years as the economy expands and credit demand picks up.
But Tyson told reporters at a White House press briefing that even the revised forecasts for the rates may be undershooting the mark. She noted that last-week, the 10-year note was trading at around 5.5%, below the 5.9% forecast by the administration from 1994 onward
The OMB report increases slightly the administration's estimates for inflation compared to those issued in April. But the changes are not large, and the long-term outlook for prices remains benign. The report estimates consumer prices will rise 3.3% both this year and in 1994. For 1995 through 1998, prices are seen rising 3.5%.
"We have a moderate inflation forecast," said Tyson. "We don't see anything on the horizon in terms of our policies at home or the rest of the world which would suggest an uptick in inflationary pressure."
The OMB report emphasizes that the combination of the President's deficit reduction program and low inflation should create a sound climate for keeping long-term rates low.
"There is solid evidence that the decline in long-term interest rates has not been caused by an anticipation of economic weakness," the report says. "If that were true, the stock market would have declined, because it would have anticipated reduced profits as a result of the slowdown.
"On the contrary, the stock market has reached record highs at the same time that interest rates have declined."
The report goes on to argue that the decline in rates is not solely the result of a slowing in inflation. "In fact, the inflation rate has been at about the same low level for 10 years," it says.
Instead, the report argues that financial markets are "finally convinced that federal economic policy will be responsible, making continued near-stable prices more likely, and thus allowing long-term interest rates to fall to a level in keeping with current inflation.
"Thus, the behavior of both stock and prices reflects a consensus in the financial markets that the plan will work and will bring the deficit down," the report says.
Tyson said administration officials believe there are good prospects for avoiding an overheated economy and rising budget deficits that would force up interest rates and lead to another recession. She did not mention the Federal Reserve, but she said the increases in rates in the administration's forecast would be consistent with a long-term economic recovery.
Tyson said the decision to lower the forecast for growth this year was entirely due to unexpected events in the first half. She cited the continuing recession in Western Europe and an unexpected drop in defense outlays. She also noted that the revised GDP figures released this week suggested employees rushed to grab bonus income late last year to beat yearend tax law changes.