Treasury Secretary John W. Snow said Tuesday that soaring federal deficits would not cause a "significant" rise in long-term interest rates.
But even as he spoke, the Senate was voting to slash President Bush's proposed $726-billion tax cut to around $350 billion, as opponents argued that the nation couldn't afford Bush's plan with federal borrowing already surging.
Snow, speaking to the National Assn. for Business Economics, sought to downplay a concern that was a perpetual issue on Wall Street in the 1980s and early 1990s: the fear that massive federal borrowing would "crowd out" other borrowers, driving up the cost of money.
Many economists believe the budget deficit will balloon to the $300 billion-$400 billion range this year and next.
The administration has argued that deficit spending is necessary to provide stimulus for the economy and to cover the costs of the war with Iraq.
Snow and other administration officials also have argued that the deficits are modest and manageable for a $10-trillion U.S. economy.
Most experts concede it can't be demonstrated that deficit spending inevitably fuels higher interest rates. Indeed, long-term bond yields were declining in the early 1990s even amid huge deficits.
Still, "Once you start going to $400- or $500-billion deficits you're really starting to push things," said Joel Naroff, head of Naroff Economic Advisors in Holland, Pa.
In an improving economy businesses would be expected to need more credit, but in theory the government's borrowing needs would always be filled first, analysts noted.
So far, Wall Street hasn't shown much anxiety over the deficit issue.
Long-term Treasury bond yields have jumped over the last two weeks, but analysts say that has reflected optimism that the war will go well for the United States, in turn lifting yields from levels that arguably were artificially depressed by war fears.
The 10-year T-note yield ended at 3.94% Tuesday, compared with 3.56% on March 10.
In his speech, Snow said the Treasury had no plans to begin borrowing again via 30-year bonds. The government stopped auctioning those issues in the late 1990s.