COLUMBUS, Ohio -- The U.S. budget deficit could shrink by 1995 without any policy changes, partly because of lower interest rates, said Jerry Jordan, president of the Cleveland Federal Reserve Bank.
It is "very easy" to extrapolate a deficit of $150 billion to $155 billion with no new initiatives, he said after speaking before the Columbus Association of Business Economists.
A pickup in gross domestic product and reduced defense spending could also contribute to a smaller deficit, Mr. Jordan said.
The Public's Reaction
He also said the M2 monetary aggregate was failing to meet its growth target because certificates of deposits are not being renewed.
"I think it's a question of the public slowly, very slowly deciding what's good yield," Mr. Jordan said.
If people believe the Fed will stick by its goal of zero inflation, they will decide that current yields are acceptable, he added.
Addressing the difference in yields between CDs and other investments, Mr. Jordan said that if consumers wait long enough, the differential should narrow.
Debts Being Reduced
He said the U.S. economy was similar to that of the early Sixties because the United States is heading toward a lower rate of inflation.
Much of the current economic sluggishness is attributable to restructuring in corporate and personal debt, Mr. Jordan said. Companies and individuals are taking advantage of lower interest rates to reduce their debt, he noted.
That means they are not spending that money in other areas that could help strengthen the economy.