Coaxing the Fed to keep cutting rates Administration says they can go lower

WASHINGTON — WASHINGTON -- Top administration economists have stoutly rejected suggestions by Federal Reserve officials that the central bank not consider cutting short-term interest rates because of fear that this could fuel an unwanted speculative bubble in stocks and bonds.

The economists said near-record stock and bond levels in no way constituted a bubble, but were rather a justified response to lower interest rates, which they said were fostered by lower inflation and President Clinton's deficit-reduction efforts.


"We at the Treasury have not been concerned about speculative bubbles," said Alicia Munnell, assistant treasury secretary for economic policy. "It's true stock prices are high, but if you look in the real estate area, commercial values are way down and family homes are down in value. You don't see an economywide speculative bubble."

In interviews last week, David W. Mullins Jr., the Fed's vice chairman, and Lawrence B. Lindsey, a Fed governor, expressed fears that further rate cuts could cause a surge in investment that would push financial markets to unjustifiable levels, setting the stage for a plunge. But Mr. Mullins said that current stock and bond prices did not appear inflated.


Traders said the central bankers' remarks helped push down the bond market late last week because the comments hinted that the Fed's next move might be to raise, not lower, rates.

J. Bradford De Long, a deputy assistant treasury secretary, said: "I was surprised people would talk about a speculative boom in the bond market. They were saying things I would not expect people to say."

Alan Blinder, a member of the President's Council of Econmic Advisers, also dismissed the idea of a speculative bubble, saying, "Given the gradual nature in the rise of the stock market with the gradual brightening of U.S. economic performance and the lowering of long-term rates, there doesn't seem to be a great disjuncture between stock market values and economic fundamentals."

Mr. Blinder also said the bond market had "risen for very sound fundamental reasons," including the prospects of a lower Federal budget deficit and the "gradually dawning realization that we're living in a low-inflation world."