WASHINGTON -- President Clinton's economic advisers, suggesting that the Federal Reserve's drive to slow the economy to a more sustainable growth rate is on the right track, predicted yesterday that short-term interest rates could start to fall before the end of the year.
Also, disputing the assertions of a vocal minority, the economic advisers reluctantly concluded that the long-run growth potential of the U.S. economy had not substantially improved.
"The preponderance of the available empirical evidence supports the conventional wisdom that the economy's productive capacity is expanding at roughly a 2.5 percent annual rate," the President's Council of Economic Advisers said in its annual report on the economy. A slight rise in productivity in recent years, the report said, is being offset by slower population growth.
Some analysts say the economy can expand much more rapidly without causing inflation to accelerate. That position makes them critical of the Federal Reserve's yearlong policy of trying to slow the economy by raising interest rates.
The council predicted that with the higher interest rates, the economy would achieve a "soft landing" this year. Indeed, by bringing the actual growth rate of the economy -- which reached 4 percent last year -- closer to its long-run potential, the Federal Reserve will not need to keep raising rates, the advisers said.
"The moderation in growth, we think, will lead to some easing in short-term interest rates," said Laura D'Andrea Tyson, head of the panel.
While the White House doesn't comment on Fed policy, Ms. Tyson's short-term forecast effectively confirms that the president's 1996 budget estimates are based on an assumption that the Fed won't raise interest rates in 1995.
The administration forecast that the economy would expand 2.4 percent in 1995, measuring from the fourth quarter of last year to the fourth quarter of this year.
The report disputed the predictions of some analysts from the auto industry and elsewhere that an overdose of higher interest rates might tip the economy toward recession.
Among the council's predictions were that the yield on three-month Treasury bills would drop to 5.5 percent in 1996 from the current 5.95 percent; that the rate of increase in consumer prices would climb 0.6 percentage point, to 3.2 percent, and that the unemployment rate would average between 5.5 percent and 5.8 percent, or about the same as the January rate of 5.7 percent.
At a photo session in the Oval Office to highlight the report, Mr. Clinton attacked Republicans who have said his budget does not do enough to curb the budget deficit.
"I find it amazing," the president said, "that people who were here digging the country in the hole I've been digging us out of are now saying I'm not getting us out quick enough."
Citing House Speaker Newt Gingrich, among other Republican leaders, Mr. Clinton said that "all those people, including the speaker" helped quadruple the deficit during the Republican presidencies of Ronald Reagan and George Bush.
Mr. Clinton did not mention that Democrats had control of both houses of Congress for six of those 12 years and that they ran the House of Representatives, where all spending bills must originate under the Constitution, for all 12 years.