Greenspan links rates to budget Fed Chairman warns of adverse consequences of continued deficits

November 03, 1995|By BLOOMBERG BUSINESS NEWS

NEW YORK -- U.S. long-term interest rates would fall if President Bill Clinton and Republican leaders in Congress reach a compromise plan to balance the budget, Federal Reserve Chairman Alan Greenspan suggested last night.

"Long-term interest rates have fallen this year, in part because of the growing expectation that a credible, multiyear plan for deficit reduction will be adopted," Mr. Greenspan said in a speech before the Concord Coalition, a group advocating deficit reduction.

He declined to make any specific projection about how much further rates could fall after a budget deal is reached but &L highlighted a study that shows long rates have risen "by approximately a full percentage point, on average, since the 1960s" in major nations with chronic budget deficits.

Yet failure to produce a promised balanced-budget plan could lead to chaos in financial markets and a slump in the U.S. economy, the Fed chairman warned. "It is difficult to overstate the historic importance of the current initiative" to curb government overspending in the U.S., he said.

A breakdown in the talks "would signal that the United States is not capable of putting its fiscal house in order," he said, carrying with it "serious consequences for financial markets and economic growth."

Mr. Greenspan's comments come at a particularly sensitive time for the federal government because the U.S. Treasury's ability to operate has become a pawn in the balanced-budget stalemate.

Yesterday, Senate Majority Leader Bob Dole said Congress will not pass debt-limit-extension legislation by Monday. The delay is likely to force the Treasury to postpone its planned auction of $31.5 billion in notes next week.

Mr. Greenspan steered clear of the debt-limit controversy in his speech and focused on extolling the benefits of deficit reduction -- and the negative consequences of lax fiscal discipline.

Declining long-term interest rates are one reason the U.S.

economic expansion, now in its fifth year, continues to surge, he said.

Lower long-term rates have "helped stimulate private, interest-sensitive spending" such as purchases of homes and autos, "lending support to economic activity," he said.

Economic growth accelerated from a 1.3 percent yearly rate in the second quarter to a robust 4.2 percent clip during the third quarter, though analysts say it may since have slowed a bit.

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