The chairman of President Carter's Council of Economic Advisers yesterday said he did not expect a sharp runup in interest rates as a result of the government's need to finance a projected $61 billion budget deficit.
Charles L. Schultze said he sees "no cause for alarm" that the federal government would crowd out other borrowers and send interest rates soaring, as a number of money market observers have predicted. He did concede that "some bulge" in rates might lie ahead. Some further increase in interest rates would be normal for the latter stage of an economic recovery, he said.
Schultze said the January economic statistics - which show a marked slowdown industrial production and a weakening in retail and auto sales while employment rolls continuing coal strike and the severe winter weather hitting much of the country.
"The fundamentals for continued economic growth in 1978 are still good," Schultze told a news conference. But later he said "that performance will not continue to be good without taking further action," referring to the Carter administration's proposed $25 billion tax-cut program.
Schultze told the business audience "this administration does not intend to let inflation get out of hand." But he added that "renewal of inflationary pressures'would force a painful reappraisal of the prospects for reaching our economic goals - by the administration, by the Congress, and by the public at large."
The CEA chairman made his remarks prior to a speech before the Congerence Board, a private business research organization, where he also warned "that the pace of recovery will slow unless steps are taken to bolster consumer purchasing power and strengthen the outlook for business investment."
At the news conference, Schultze predicted that the U.S. deficit on current account this year will be "in the neighborhood of what it was in 1977." Preliminary estimates put that figure at $18 billion - But he conceded that the coal strike may cause an increase in oil imports in the first quarter, widening the trade deficit.
As for the economic impact of the coal strike so far, Schultze said that it was "relatively small and not particularly noticeable" in the context of a $2 trillion economy, though some parts of Ohio, Michigan, Indiana and West Virginia have been hit hard.
Concerning the continuing drop of the dollar on foreign exchange markets, the CEa chairman said it was premature to declare the dollar had come under a renewed speculative attack. He expressed satisfaction with the degree of Federal Reserve Board intervention in recent days to defend the currency. "I have no reason to complain," Schultze said of the Fed's intervention tacties.