The already uncertain outlook for interest rates this year is being further complicated by good news about the federal budget deficit.
With strong tax receipts and falling government expenditures, the deficit for the current fiscal year may sink to $116 billion, the lowest point since 1982, according to Lacy H. Hunt, chief economist at HSBC Markets Inc., New York.
Mr. Hunt thinks that means lower interest rates, since the economic stimulus of federal spending is reduced and at the same time the Treasury is not competing so much with private borrowers in the credit markets.
"The cut in the budget deficit is not consistent with acceleration in economic growth, inflation, or higher interest rates," he said. Some effects are already being sharply felt, such as layoffs by defense contractors, but others could take "a long time to work their way through the system."
For similar reasons, Wayne M. Ayers, chief economist at First National Bank of Boston, the Bank of Boston Corp. flagship, also thinks economic growth likely to be subdued in this year's second half.
"When the fiscal year ends in September, we will have seen four consecutive declines in the federal deficit," he noted. "To my knowledge, that has never happened before."
Mr. Ayers estimates this fiscal year's deficit at $135 billion, down from $164 billion in the year ended last Sept. 30 and far beneath the $290.4 billion for the 1992 fiscal year.
The deficit is a powerful economic spark plug, equivalent to 4.2% of gross domestic product at the 1992 peak. This year, at a level of about $130 billion, it may fall to less than 2% of projected GDP.
Were it not for interest payments on government debt, Mr. Ayers pointed out, "the federal budget would be in what is called a 'primary surplus.'
"In other words, except for payments to bondholders, the government is taking out of the economy far more than it is putting in," he said. "That has happened five times in the past 25 years, and each time it has led to a weak or even a recessionary economy."
But not everyone agrees that a weaker economy and lower rates are inevitable. About half of the economists expect higher rates. "Opinions are split right down the middle," Mr. Ayers noted.
A major reason the deficit has fallen is higher tax revenue, which in turn means that growth of income in the economy is brisk.
"On balance, the reduction of the deficit is favorable for rates," said Robert G. Dederick, economic consultant to Chicago's Northern Trust Co. "But the other side of the coin is that this is the result of a more vigorous economy, which will act to push rates higher."
Indeed, Mr. Dederick expects GDP in the second half of this year to grow at a relatively brisk 2.4% annual rate. As a result, he sees a 40% probability that the Federal Reserve will tighten credit to restrain the economy by late summer and a 70% chance it will do so by yearend.