Saturday, May 30, 2009

Jittery Bond Market Threatens President's Agenda

The Wall Street Journal - WASHINGTON -- Senior Obama administration officials said Friday that policy adjustments necessary to contain soaring budget deficits would be made once an economic recovery takes hold, in response to growing concerns about a run-up in long-term interest rates.

Treasury Secretary Timothy Geithner, National Economic Council chief Lawrence Summers and Office of Management and Budget director Peter Orszag said in separate interviews that the administration was acutely aware that rising interest rates pose a threat to the improving U.S. economy.

Yields on 10-year Treasury notes have risen 1.5 percentage points this year as bond traders pull back amid worries about rising federal debt. Higher yields will leave the government with higher interest costs and still higher deficits. They could also push up other forms of interest rates, making borrowing more expensive for many people.

On Thursday, the Treasury Department is expected to announce an auction of roughly $65 billion in three-year, 10-year and 30-year notes and bonds, and the result will be closely watched.

"We're going to do what's necessary," Mr. Geithner said. "That's the only way you're going to get a strong, sustainable recovery." As soon as a recovery takes hold, the administration will reduce the deficit to a sustainable level, he said, adding, "That's difficult, but critically important."

Mr. Orszag said the administration's commitment to fiscal rectitude would become clear in coming weeks when President Barack Obama demands that any health-care plan drafted in Congress be fully paid for. That pledge, he said, "is ironclad, no ambiguity, not up for negotiation."

Additional steps on the deficit may become necessary, he added, and the administration is committed to turning to Social Security next.

"There is not a day that goes by that the president and the economic team do not focus on the long-term commitment to decrease the deficit," Mr. Summers said.

The comments by the administration officials were aimed at calming worries on Wall Street, and indicated concern that rising interest rates might imperil the president's domestic agenda, as they have done to the plans of previous Democratic administrations.

Some officials tried to play down market fears about federal borrowing. The jump in long-term interest rates, both in Treasurys and mortgages, is more a product of technical factors, they argue, than a reaction to Washington's borrowing.

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