Bentsen Predicts Interest Rates Will Rise in ’94 : Economy: The Treasury secretary’s comments suggest that the Administration wouldn’t fight a Fed move to tighten money supply.

In a signal that the Clinton Administration is prepared to accept at least some brakes on the nation’s economic recovery, Treasury Secretary Lloyd Bentsen predicted Wednesday that the economy will have to weather a period of higher interest rates and declining stock prices in 1994.

His remarks suggest that the Administration, which had hoped that low interest rates would continue to feed the recovery through 1994, now believes there will be some economic speed bumps along the way. Even so, Bentsen said the Administration expects the recovery to remain on track and unemployment to subside this year.

Discussing the economic outlook with a small group of reporters, Bentsen said it appears likely that there will be a modest increase in short-term interest rates and that stock markets will experience a downward correction.

He did not predict that the Federal Reserve Board will orchestrate the interest rate increase as part of its mission to keep inflation in check, but the Fed has broad power to influence short-term rates.

While Bentsen’s comments echoed the forecasts of many private analysts, it is unusual for a Treasury secretary to predict such developments. Among other things, his comments served as a signal that the Administration would not argue against a Fed decision to push interest rates higher.

He did not take credit on behalf of the Administration for the decline in interest rates that has sent them to their lowest levels since Lyndon B. Johnson was President, or for a drop in inflation, which he said is now at an “acceptable” level. At a rate of 2.8%, he said, inflation is at its lowest level in 28 years.

But he did say these developments are attributable, at least to some degree, to the Administration’s efforts to tackle the budget deficit. The Administration has put forward a plan intended to trim $500 billion from the deficit over five years.

Bentsen also chided Japan for not doing more to stimulate its ailing economy.

“Japan, with its huge trade surplus, cannot look to the United States and other countries to make up for slack demand at home,” he said in a speech intended to give the Administration a pat on the back for its first-year economic performance and to send a signal of confidence in the future.

He acknowledged that the U.S. interest in a growing domestic market in Japan is based on the need to build overseas consumption of U.S. products.

And, in a comment that set off a small flurry in currency markets, Bentsen said that meddling with the exchange rate of the yen--allowing it to fall in value in relation to the dollar to make Japanese products more competitive in the United States, for example--is not a course favored in Washington.

“Allowing the yen to slide is not an acceptable way out of recession for Japan,” he said. The dollar rose to 112.90 yen, up from 112.60 on Tuesday, after falling earlier in trading in Tokyo. The dollar was mixed against other currencies.

Some analysts attributed a rise in interest rates Wednesday to apprehension in the market over Bentsen’s comments. The Treasury’s key 30-year bond yield rose to 6.40% from Tuesday’s 6.34%.

Bentsen addressed the Administration’s 1993 economic efforts in two separate forums, first with reporters invited to his conference room and then in a speech at the Brookings Institution, a public policy research organization.

“I want to see that the Administration gets some credit for it,” Bentsen told reporters, reflecting the political sensitivity attached to the role that a successful economic recovery is likely to play in President Clinton’s political fortunes.

In addition to low interest and inflation rates, he cited positive signs that include a “booming” stock market, falling unemployment, increases in productivity, lowered business debt and greater business equity.

Predicting more of the same for 1994, he said: “I’d like to see us achieve a solid 3% real growth and hold inflation to approximately 3%. This should allow interest rates to remain relatively low and reduce further the unemployment rate. . . . It’s been a good first year--solid, steady, non-inflationary growth--and we’re planning to sustain this one.”

But asked whether he agrees with the assessment of private analysts that 1994 would see a correction in the stock market, he said, “That would not surprise me.”

Still, he added that he did not expect any such drop to become “so major as to slow down the growth of business.”

Asked whether he anticipates any move to boost interest rates in the first quarter of the year, he said the Administration assumes “there will be a modest increase in short-term rates.” But he took care not to say when it would occur or how long it would last.