Federal Reserve Board Chairman G. William Miller sat down last week for his first published on-the-record question-and-answer interview. Miller was interviewed by Washington Post staff writers Art Prize and James L. Rowe Jr.
Question: Mr. Miller, many economists have been worried that the Federal Reserve Board's recent upward push on interest rates soon may reach the point where it might crimp the economy.Are interest rates going to peak anytime soon, or do you expect them to continue rising further?
Answer: I hope we're going to see them peak between now and the beginning of the year. The economy operated at a very high real level of growth in the second quarter, reflecting both catchup from the problems of the first quarter - winter weather and strikes - and some anticipatory buying that made the second quarter stronger. Now, we expect the economy to be slowing down. The economy is fairly well balanced. There's continued high demand for credit, but pressure for that demand should be slackening as the economy slows and we get past that high level of activity.
Q: How much do you think the Fed can tighten up and still not hurt the economy? How much more can the economy stand?
A: Well, we have an interesting phenomenon here. When you have a generation that has lived generally with historically low interest rates and you tighten credit, you have a certain impact: Credit becomes more expensive, and knowing - and economic activity - tends to taper down.
But today, we have an experience where people just a few years ago have lived through high interest rates - even higher than those of today, in some categories. And people see that those who bought houses then haven't suffered any. And the public has built up sort of antibodies that resist the impact of higher interest rates.
So it appears that it takes a higher degree of tightening or higher interest today to create the same restraint in buying or spending that it would have a few years ago. My only explanation is that we got used to it, and now, on the second time around, we've developed more tolerance for the disease.
And that makes it more difficult for us becuase it's harder to judge how much you're biting into the demand and how much you are restraining the economy. And that's why it takes very good judgment through this period not to overshoot either way.
Q: So on that basis you don't really think that we've heard the brink yet?
A: Well, that's not clear yet. If it does take more restraint this time than in comparable conditions four years ago, five years ago, then with a little more tightening we'll get the same result. On the other hand, if this restraint is already biting and we haven't yet seen it because of the peculiarities of the second quarter's economic figures, then maybe we've actually tightened enough - or nearly enough. So we've got to be careful. That's why I think this period is particularly critical in judging when you have to switch directions.
Q: In that sense, then, were you encouraged at all when the second quarter's economic performance didn't turn out to be as buoyant as most economists had expected? Or was this, as some administration officials have said, more of a disappointing factor?
A: Well, I'm going to reserve judgment on that. As you know, these figures always are revised as more data come in. And I think that before the numbers are final, we're going to see that the real growth rate for that period actually much closer to an 8 percent annual rate, rather than the 7.4 percent that was reported in the preliminary estimates. That's just a hunch, of course. I can't give you any scientific evidence. The first quarter's statistics also were revised upward later, you remember.
Q: Mr. Chairman, there's a lot of concern now about the sharp decline of the dollar, particularly in relation to the Japanese yen. How much does this new dollar slide really worry you? Is there any new action you feel the U.S. should be taking?
A: Well, in the first place, I view this as a breakout of the yen rather than a decline of the dollar. The yen has broken out and is appreciating, as all currencies do, because of the very high balance of payments surplus that the Japanese have been accumulating. There are some side effect, of course, on the relationship between the dollar and the Swiss franc and other European currencies, but that's minor adjustment. The real breakout is the Japanese yen.
Now, what we've seeing now is not only the adjustment to relative rates of purchasing power of the yen and the dollar, but an anticipation of continuing change. There's an adjustment into the future taking place.
The fact is, that on an inflation-adjusted basis, the yen actually is overvalued right now. But because of the size of figures involved and the fact that the market is adjusting without any real turmoil, it's going to be very hard to take any new action. The Japanese have been intervening in the foreign exchange markets to ensure an open market - and that helps.
But what we have to do is more over the long term - reduce our inflation rate and pare back our own current account deficit (the surplus of imports and U.S. investment abroad over exports and foreign investment here). When that happens, then the normal adjustment will go the other way and we'll have a stable dollar again.
Q: When the dollar was in trouble earlier this year, the Fed raised domestic interest rates to help attract more dollars back to the U.S. Back then, that was viewed as a pretty tough step. And many people think it helped stem that earlier slide. Is this new dollar problem going to make it more difficult for you to stop raising interest rates when you near what you think is the limit on how much you can tighten?
A: Well, none of us really sees interest rates declining immediately. When I mentioned the hope that interest rates might peak soon, I was careful to point out that it was unlikely that they actually would decline until some time next year. And then we have to wait and see how the scenario works out.
To answer you more directly, I believe our monetary policy will be aimed primarily at dealing with domestic conditions, and that those domestic conditions will continue to require restraint.So therefore we can expect to see a continuation of the difference between interest rates here in the U.S. and those in Japan. That means conditions will continue to exist that make it easier for foreigners to hold dollars. I think that's consistent with our domestic needs, too, and so it creates no special pressure on us.
Q: You say we have to deal with the economic "fundamentals" - such as inflation - to solve our longer-term economic problems. How do you think the fight against inflation is going? Is the administration's new anti-inflation program likely to work?
A: Several things have been working. The president and Congress have restrained the increase in federal compensation.
On the postal settlement, at least there was no strike - and that's a step in the right direction. The postal settlement may have been slightly higher than some of us would have thought ideal, but at least it marked a deceleration from the previous contract.On another front, we've seen the administration shift from a tax cut proposal of $25 billion last January to one of $20 billion, or even $15 billion, now. And the federal budget deficit the president projected last January for fiscal 1979 has shrunk from $60 billion to below $45 billion, and that's a positive step. So a number of things have been happening.
But as I've mentioned a number of times, the president's April 11 anti-inflation announcement was only the start of the process, and I think this process has to continue. There are others that ought to be considered. For example, last January's increases in payroll taxes could be deferred for one year. Then there's also the increase in the minimum wage scheduled for next January. Both will contribute substantially to inflation.
Q: You mentioned that you thought that, generally speaking, the economy was pretty well in balance and there were no signs of major trouble. Do you see any danger of a recession, either from some new flaws that seem to be developing or possible from overheating?
A: The reason I say the economy's balanced is that I don't see any sectors that seem to be overheating. Nor do I see any of them softening, either. For example, consumer spending is continuing at a high level, and with the substantial increase over 2 million jobs in the past six months,you can expect a continued growth in personal income.
On the question of business investment, inventors are in good balance in relation to sales. There's no overaccummulation. So that isn't the problem. Certainly, there's need for more business investment. Housing is being constrained somewhat, but it's not under great pressure. In other words, there's a more even restraint across the economy as we exercise monetary policy instead of that restraint falling heavily on one sector or the other.
And so the conditions are there so that, if our economic policies are operated correctly, we should be able to continue this expansion for some time.
Q: In the past several weeks, the Fed has been under some fire from the administration about the recent rise in interest rates. Some White House officials apparently are fearful it will hurt the economy. Since you were appointed by President Carter, how do you view the administration's criticisms?
A: As quite mild.
Q: What do you mean?
A: Well, despite the fears some of them have expressed, they wll say we've done the right thing so far. We hope we don't have to do too much more. They recognize that you have to restrain credit demand in the economy or otherwise you'll run into demand-pull inflation to go along with the cost-push inflation we've got now. I think their criticism reflects a degree of hope, that we're coming to the end of the period of monetary restraint. But they also seem to recognize that we've got to see the economy slowing a bit.
Q: How much farther will the Fed need to go?
A: Well, I'm willing to continue as necessary to get the job done, but I certainly want to see how it's behaving and not just go in an irrational course. The economy is in fact adjusting down to a more sustainable growth rate - that is, a pace that helps to dampen inflation. And hopefully we can avoid a recession. If, on the other hand, it's continuing to bubble away, we'll have to take another notch. But we don't want to take the notch until we're sure of what's happening in the economy.
Q: I'd like to go back for a moment to your own role as chairman of the Fed. There's been a lot of talk recently about an accord between you and the administration - a hint of possible easing of monetary policy if White House takes action to tighten up on fiscal policy. But a lot of people think you'll be unable to deliver when the time comes because essentially you're facing a hawkish board - that you're only one man in a group of board members who are hell-bent on squelching inflation that all costs. Is that true? (KEY OFF)(KEYWORD): I don't think we have hawks and doves. I see an atmosphere very open. And I know of no circumstances that will inhibit me from acting - as I do in all things - for what I believe to be the right judgment under the circumstances. We have been remarkably in accord in the board and in the FOMC on these monetary matters, and there are very few cases where we call the thing differently.
Q: Several weeks ago, the board voted to raise the discount rate over your objections. What if you had that vote today?
A: Well, I think if I had that vote today I would vote for the discount rate increase. I wanted to hold off and see if the monetary aggregates continued to grow. They did and I think that indicates an increase was desirable, I think the other people may well have been right on their votes.