There is no reason for long-term interest rates to come down in the months ahead, given the current outlook, current monetary policies and the size of the federal budget deficit, Council of Economic Advisers Chairman Martin S. Feldstein said yesterday.
Feldstein said current interest rates already reflect an expectation by financial market participants that there now is room for the money supply to expand and still remain within the target ranges set by the Federal Reserve.
"Unless something unexpected happens, there is no reason for long-term interest rate to come down," the CEA chairman told a meeting of the Mortgage Bankers Association of America.
And if no action is taken to break the present impasse between Congress and the administration over how to reduce prospective $200 billion annual budget deficits between now and 1988, he warned, "we will see higher real interest rates" in the future.
Meanwhile, Sen. Lawton Chiles of Florida, ranking Democrat on the Senate Budget Committee, declared that the economic recovery itself is being endangered by the large deficits. He called on Congress to live up to the terms of its 1984 budget resolution that mandates spending cuts and some tax increases to begin to reduce the deficits.
"If Congress doesn't enforce the budget, the deficit could surge to 6.3 percent of GNP, and heaven only knows where that will take interest rates. Chances are it will take economic recovery straight to hell," Chiles told the National Association of Mutual Savings Banks.
Feldstein, while stressing the adverse effects of high real interest rates on the nation's trade and investment, and the effects of large deficits on rates, did not suggest that the recovery is in any danger.
The economic recovery will continue, he said, with increases in the gross national product, adjusted for inflation, averaging 6 percent to 7 percent at an annual rate in the second half of this year. "In 1984 it will be a slower but still respectable in the 4 percent to 5 percent range.
The CEA chairman predicted there would be some acceleration in inflation next year, with consumer prices going up between 4 and 6 percent.