Fed Advocates Taming the Budget Deficit

JACKSON, Wyo. — Federal Reserve Board Chairman Alan Greenspan said Friday that cuts in the U.S. budget deficit would lead to lower interest rates and that the dollar would not necessarily be weakened as a result.

Addressing a conference here on deficits and debt sponsored by the Kansas City Federal Reserve Bank, Greenspan said the dollar could benefit from an attack on government red ink that would boost confidence in the United States’ ability to handle inflation long-term.

“If we have a significant reduction in the budget deficit, short-term interest rates and intermediate interest rates will fall,” he said.

Some economists at the conference argued that the lower rates would lead to a weaker dollar by making it a less profitable currency for international investors to hold.

But Greenspan said that would not necessarily be the case. Although lower rates might weaken dollar demand from short-term investors, credible budget cuts could boost demand from longer-term investors because it would increase their confidence in the United States.

After falling to record lows below 80 yen in April, the dollar has rebounded in recent weeks toward the 100-yen mark, as trade tensions between the United States and Japan have eased and interest rates overseas have fallen.

The dollar is still about 25% lower than it was against the yen 2 1/2 years ago.

Greenspan made it clear that he is puzzled by the dollar’s weakness earlier this year, saying, “[Our] ignorance [about that] is terribly pronounced.”

In opening the conference, the Fed chairman warned that persistent budget deficits cause real economic damage, and he called for a sustained attack on government red ink.

“Today’s actions and commitments are only the first step,” Greenspan said.

“Finding and implementing lasting solutions to the . . . deficit problems will be neither easy nor simple,” he said.