WASHINGTON -- Robert Rubin, chairman of President Clinton's National Economic Council, said yesterday that long-term interest rates will remain low because market psychology has undergone a sea change with passage, of Clinton's 500-billion deficit reduction plan.
"We have changed market psychology. The markets truly believe we have gotten our arms around the deficit problem. I think there's been a real change in inflationary expectations." he said in an interview with financial reporters.
Rubin was defending the administration's recent rate forecast, contained in its midyear economic review, Which projects that the rates on 10-year Treasury notes will remain just below 6% for the next five years. The Congressional Budget Office. by contrast, sees rates hovering just above that level for the same time period.
Passage of the deficit bill produced a "remarkable turnaround" in the absolute level of the deficit and in the percentage it represents of gross domestic product, as projected over the next five years, Rubin said.
According to both the administration's and the CBO's estimates, the deficit will fall to below $200 billion by fiscal 1995 from its record high of $290 billion in 1992, and will remain at that level through 1998. As a percentage of gross domestic product, the deficit will fall by nearly half, from 4.9% last year to 2.5% in 1998, the CBO says.
"Nobody said the deficit reduction bill was a panacea," but the measure, along with the administration's other low-deficit and low-growth policies, has convinced the bond markets that the debt picture and inflation prospects are significantly improved, Rubin said.
Rubin also pointed to administration policies for reinventing government, reforming health care, and winning passage of the North American Free Trade Agreement.
The health-care package will reduce the deficit by another $91 billion between 1996 and 2000 through mandatory controls on the government's health-care spending, even as it extends health-care coverage to all Americans, he said. Meanwhile, the reinventing government proposals are designed to cut another $108 billion out of the deficit over five years.
The President is willing to fight for what he believes at the expense of his short-term political advantage, Rubin said. "Clinton has made a pretty gutsy decision to put a lot of programs in place whose benefits are long-term and which are good for the country." he said.
The administration's low-rate forecast also is based, Rubin said, on the assumption that economic growth with remain moderate.
"We have an ongoing recovery that is pretty moderate, it's just chugging along," he said. The administration does expect growth to "firm up" somewhat, however, as businesses and consumers regain confidence in the economy, he said.
