Bentsen concedes rise in interest rates is likely

January 06, 1994|By Los Angeles Times The New York Times News Service contributed to this article.

WASHINGTON -- In a signal that the Clinton administration is prepared to accept at least some brakes on the U.S. economic recovery, Treasury Secretary Lloyd Bentsen predicted yesterday that the economy would have to weather a period of higher interest rates and declining stock prices in 1994.

His remarks suggest that the administration, which had hoped that low interest rates would continue to feed the recovery through 1994, now believes there will be some economic speed bumps along the way. Even so, Mr. Bentsen said, the administration expects the recovery to remain on track and unemployment to subside next year.

Discussing the economic outlook with a small group of reporters, Mr. Bentsen said it appeared likely that there would be a modest increase in short-term interest rates, and that stock markets would experience a sell-off.

He did not predict that the Federal Reserve would orchestrate the interest rate increase, as part of its mission to keep inflation in check, but it is the Fed that most widely controls the course of short-term interest rates.

While Mr. Bentsen's comments echoed the forecasts of many private analysts, it is unusual for a treasury secretary to predict such developments. Among other things, his comments serve as a signal that the administration accepts the likelihood that the Fed would decide to push interest rates higher.

A Treasury Department official who insisted on anonymity said that the administration was still discouraging the Federal Reserve from raising interest rates. But the department believes that some increase is inevitable anyway, the official said.

Mr. Bentsen did not take credit on behalf of the administration for the decline in interest rates, which have fallen to their lowest point since the 1960s, or for a drop in inflation, which he said was now at an acceptable level. At an annual rate of 2.8 percent, he said, inflation is at its lowest level in 28 years.

But he did say that these key economic developments were due, at least to some degree, to the administration's efforts to tackle the budget deficit. The administration has put forward a plan intended to trim $500 billion from the deficit over five years.

Mr. Bentsen also chided Japan for not doing more to stimulate its ailing economy.

"Japan, with its huge trade surplus, cannot look to the United States and other countries to make up for slack demand at home," he said in a speech intended to give the administration a pat on the back for its first-year economic performance and send a signal of confidence in the future.

He acknowledged that the United States' interest in a growing domestic market in Japan was based on the need to build overseas consumption of U.S. products. "We want to see Japan's [trade] surplus significantly reduced, and that will require strong domestic demand in Japan, more open markets, and exchange rates that reflect the underlying cost competitiveness of Japan and its trading partners," he said.

And, in a comment that set off a small flurry in currency markets, Mr. Bentsen said that meddling with the exchange rate of the yen -- allowing it to fall in value in relation to the dollar to make Japanese products less expensive in the United States, for example -- was not a course favored in Washington.

"Allowing the yen to slide is not an acceptable way out of recession for Japan," he said. At nearly 113 yen to the dollar, the Japanese currency has reached its lowest level in nearly nine months.

The yen climbed briefly after Mr. Bentsen's remarks but then resumed its slide. The dollar dipped to about 112.35 yen in New York, but recovered to finish at 112.90 yen.

The treasury secretary addressed the administration's 1993 economic efforts in two separate forums, first with reporters and then in a speech at the Brookings Institution, a public policy research organization in Washington.

"I want to see that the administration gets some credit for it," Mr. Bentsen said, reflecting the political sensitivity attached to the role that a successful economic recovery is likely to play in President Clinton's political fortunes.

In addition to low interest and inflation rates, he pointed to positive signs that include a "booming" stock market, falling unemployment, productivity increases, lowered business debt and greater business equity.

Predicting more of the same for 1994, he said: "I'd like to see us achieve a solid 3 percent real growth and hold inflation to approximately 3 percent. This should allow interest rates to remain relatively low and reduce further the unemployment rate. . . . It's been a good first year -- solid, steady, non-inflationary growth -- and we're planning to sustain this one."

The latest Blue Chip Financial Forecasts, a survey of economists' predictions, estimated that the yield on three-month Treasury bills would edge up to 3.3 percent in the first quarter, from 3.15 percent in the fourth quarter of last year.

The White House's Council of Economic Advisers forecast last August that short-term interest rates would average 3.6 percent in 1994, up from 3.1 percent in 1993.

A Treasury Department aide said late yesterday afternoon that Mr. Bentsen's predictions were based on internal Treasury Department forecasts of interest rates, and that the secretary was anticipating further increases in addition to the slight upward creep of short-term rates in recent weeks.

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