Treasury Secretary W. Michael Blumenthal admitted yesterday that the Federal Reserve's tight money policy has already forced the Carter Administration to lower its growth targets, and poses "some danger" for the economy.
In an address to the National Press Club, Blumenthal delivered what amounted to a diplomatic plea to Fed Chairman G. William Miller to proceed with "understanding and caution" so as to avoid an actual recession.
Blumenthal struck a more optimistic note than offered Thursday by Democratic economist Arthur M. Okun, who said the economy "is running a very severe risk of recession" this year or next prior to the 1980 Presidential election campaign.
But Blumenthal's response, while technically a rebuttal of Okun's warning, served to underlie the growing concern in Administration circles that the higher-interest rate policy being pursued by the Federal Reserve may choke off economic expansion.
Blumenthal's acknowledgement that economic growth targets have been set back was the first such statement by a high Administration official. He predicted that the real Gross National Product probably grew about 9 percent in the second quarter - counterbalancing a weak first quarter due to cold weather and the coal strike.
But for the rest of the year, Blumenthal said that the real growth rate would only be 3.5 to 4 percent. It is the first time a figure as low as 3.5 percent has been mentioned by the Administration.
The Treasury secretary said that typical indicators of recession, such as a drop in production or sales "are not yet in evidence." Moreover, he said that the prospective passage of a tax cut later this year would give the economy a lift in 1979.
"But there obviously is a problem," Blumenthal said. "The rate of inflation is too high, and the tightening of credit has resulted in a lowering of growth targets, and clearly involves some danger. But a recession involving negative growth rates is not in the works."
Blumenthal did not comment on the possibility of a "growth recession" - a sluggish period of real growth of 3.5 percent or less, which usually causes the jobless level to rise, or at best, to stay on a high plateau.
In testimony Thursday before the Joint Economic Committee, Miller acknowledged that the Fed's persistent effort to abort inflation by raising interest rates could also choke off economic expansion. In four successive moves in 90 days, the Fed has raised the basic short-term interest rate by a full point to 7 3/4 per cent.
"I think we're going to be walking through a very narrow valley in the next few months," Miller told Congress.
Blumenthal, asked for comment on Miller's statement, told his press club audience "I would never criticize the Chairman of the Federal Reserve - certainly not in public." But he went on to observe that "there is a history of the Fed going too speedily and too far (in raising interest rates) in periods like this, and there clearly is a risk that the results could be negative."
Other Administration officials have been equally explicit. Wage-price monitor Barry Bosworth has warned that unless business and labor exercise voluntary restraint, the Fed will have no options but to tighten the money screws so hard that recession will be inevitable.
It was learned yesterday, also, that Economic Council Chairman Charles L. Schultze had flatly warned that a recession is possible in a press conference June 15 following a meeting of key economic ministers in Paris.
"Unless we control the rate of inflation." Schultze said, "I think then one must take very seriously the possibility of rising interest rates and reduced confidence to the point where the possibility of at least a growth recession becomes possible, if not even something more than that." A transcript of these remarks became available yesterday.
On other matters, Blumenthal:
Said he "personally favors" postponement of any further increase in the minimum wage, "if that's politically feasible."
Reiterated the administration's opposition to the Steiger amendment, easing capital gains taxation, as an "inefficient" way of stimulating capital investment. But he stopped short of promising a presidential veto of the Steiger proposal.
Warned against "unrealistic expectations" from the Bonn economic summit next month, observing that there are no "instant solutions to deeply rooted problems."