FED SAYS CUT IN BUDGET DEFICIT MIGHT MOVE INTEREST RATES DOWN

FED SAYS CUT IN BUDGET DEFICIT MIGHT MOVE INTEREST RATES DOWN

Interest rates might move lower if the budget deficit is cut more than

financial markets expect, the chairman of the Federal Reserve Board told Congress.

Fed Chief Alan Greenspan said Wednesday rates could fall if Congress shrinks the deficit at least $10 billion or $15 billion more than projected for fiscal 1990 and 1991 and does it believably.However, he warned the Fed can't push interest rates below what the

financial markets are already structured to accept. Such an effort would fail, he said.

He suggested boosting gasoline taxes by 15 cents a gallon to help mop up some of the budget's red ink.

Congress is studying President Reagan's budget for fiscal 1989, which shrinks the deficit moderately, according to a formula from the economic summit agreement with Congress late last year.

That accord should maintain pressure on the deficit this year and next, the Fed chairman said.

But it is crucial that further actions in support of a long-term policy of reducing budget deficits, and the associated claims on the nation's supply of saving, be implemented.

He noted that capital inflows from abroad have filled the gap between low savings and U.S. investment, but that capital influx will diminish as U.S. foreign accounts improve.

Mr. Greenspan made his pitch for deficit cutting before the Senate Budget Committee, where he was testifying on the U.S. economic outlook.

Although the Fed looks for moderate economic growth this year, the Fed chairman said the economy's future beyond 1988 will depend importantly on making more progress against budget deficits.

He reiterated his longstanding support for a gasoline tax, saying a 15- cent-a-gallon increase would raise about $15 billion, would still leave gasoline prices below their early-1980s levels and could restrain energy use.

However, he emphasized that on the whole, deficit-reduction efforts must of necessity focus on the expenditure side of the budget.

He warned against raising income taxes, because a higher tax bite could hurt the economy and because taxpayers are skeptical that the increased revenue would shrink deficits.

Mr. Greenspan took aim at entitlement programs - including Social Security and Medicare - as offering the best chances for significant savings.

Other domestic spending programs are a small and shrinking share of the total, and defense spending is already heading toward maintenance levels, he said.

The shift toward the more entrenched entitlements is needed because several rounds of deficit cutting, he said, already have taken care of the 'easy' cuts.

Mr. Greenspan urged Congress to make more progress against deficits while the economy's health is satisfactory, since an economic downturn would widen the deficit by cutting revenues and increasing government expenses.

While we all seek to avoid recessions, Congress cannot count on indefinitely sustaining federal revenues by a growing economy, he said.

The Fed chief warned against relying too much on federal loan guarantees to substitute for actual spending, since they do not reduce the government's presence in credit markets.

He praised efforts to privatize some federal services, but warned against using asset sales as a big part of long-term deficit reduction plans.