From Wall Street's standpoint, the House Thursady night was almost a caricature of itself, so paralyzed by political pressures that there was no way it could move to bring down the future budget deficits that the money markets say are holding interest rates up.
Its behavior was anticipated by Donald E. Maude, Chief financial economist at Merrill Lynch Pierce Fenner & Smith Inc., who warned a House Banking subcommittee Thursday that, without a budget compromise, the furture holds much higher interest rates. As lofty as rates are today, "markets are not behaving as if they believed" Congress will not cut the likely deficit at all, Maude said.
At the very least, continued delay in dealing with the budget prolongs the uncertainty over the eventual outcome and probably reduces chances of a healthy recovery in the second half of the year. Virtually all financial analysts say they believe the budget impasse is keeping interest rates higher than they would be if there were a prospect of declining rather than rising deficits.
Treasury Secretary Donald. T. Regan, in a sharply partisan statement, yesterday blamed the house Democratic leadership's "paralysis" for the budget failure, which he said contained the elements of "a sure-fire formula for higher interest rates."
Regan said the failure had also undercut President Reagan's posistion at next week's economic summit in France. The leaders of the other industrial nations at the summit are expected to press Reagan for a commitment to lower U.S. interest rates which they say are helping keep rates high in their countries, too.
Federal Reserve Board governor Lyle Gramley said the strength of the recovery "depends critically on how soon we get this budget problem behind us." The likelihood of large out-year deficits, such as a $235 billion figure estimated for 1985, "means a large fiscal stimulus in the future. Its stimulative effects are yet to come, but the negative effects arrive early in financial markets" in the form of higher interest rates, he said.
"We have never had this nulti-year stimulus before." If Congress can cut the deficits, he predicted there would be a "dramatic" decline in interest rates.
Despite its failure to agree on how to reduce the red ink, members of the House and Senate generally have accepted the notion that high deficits, and fear of them in financial markets, are the mjor reason interest rates are so high.
Therefore, if high rates are keeping the economy in recession, the way to a recovery is to reduce the deficits, or so the argilment goes.
There is little agreement among analysts, however, about how far rates would fall if the deficits were cut substantially.
The assumption used during the House debate--and during the earlier negotiations between Congress and the administration--was that short-term interest rates would drop by @1/2 percentage points from whateyer their level otherwise might be once action on the budget was completed.
Gramley said he expects dramatic delines in rates.
At the other end of the spectrum, former Treasury secretary W. Michael Blumenthal, now chairman of Burroughs Corp., cautioned Regan during a meeting at the Treasury that the drop in rates could be much smaller.
The fact is, after three years of essentially no economic growth, an underlying inflation rate still probably in the neighborhood of 7 percent, and a continuing tight money policy, the economy is in a situation never encountered before.
Therefore, no one can say with much certainty precisely how it would respond to a strong move to reduce the fiscal stimulus in the budget.