Federal Reserve Chairman G. William Miller yesterday warned Congress that "any further acceleration of inflation, or the occurrence of severe shortages of critical commodities, such as oil," could make it impossible to avoid a recession in the coming year.
Miller, testifying for all seven Fed governors before the Senate Banking Committee, also announced new lower money growth targets for 1979 that imply little if any easing of near-record-high interest rates any time this year.
And, after expressing some polite skepticism that President Carter's ambitious 1980 goals of both faster economic growth and significantly less inflation can be met, Miller cautioned:
"If inflationary pressures subsequently should prove stronger than the administration has projected, then the prudent course for government policy would be to exercise a substantial degree of restraint, even if it risks less real growth in 1980 than the 3.2 percent goal."
The Fed chairman, in effect, was advising both the administration and Congress that if inflation is not subsiding in 1980, the nation should accept the costs of rising unemployment to counter it.
Meanwhile, because of higher-than-expeceted food and fuel prices, one major economic forecasting firm, Data Resources Inc., is revising its inflation prediction for 1979 to 9 percent, the same rate as last year. The administration has said it expects consumer prices to rise only 7.4 percent this year.
The new money growth targets, Miller said, "will bring to bear an appropriate degree of restraint in light of the current outlook for fiscal policy and the underlying strength of private demand in the economy.
"Over the year ending with the fourth quarter of 1979, M-1 is expected to grow between 1.5 percent and 4.5 percent; M-2, 5 percent to 8 percent; and M-3, 6 percent to 9 percent," he said.
M-1 consists of the total of currency in circulation and demand deposits at commercial banks. M-2 is that total plus time deposits at commercial banks, except for large certificates of deposit. M-3 is M-2 plus deposits at thrift institutions.
These targets "are right in line with what the growth rates have been during the last six months," according to Judith Mackey, a monetary specialist with Townsend-Greenspan & Co., the New York economic consulting firm. "I don't see it as any kind of change in policy, and I don't think it means tightening at this point."
Allen Sinai, who watches money and credit matters for Data Resources, agreed. "Miller is not implying any major increase in interest rates" with these targets, Sinai said. "It means that monetary policy can fluctuate within a narrow rate in 1979."
Most recently, M-1 has been declining and M-2 growing almost not at all, to the dismay of some monetarists. Economist Milton Friedman, for example, recently criticized the Federal Reserve for being too tight-fisted and said that if the monetary aggregates do not begin to grow more rapidly soon, a recession will be assured.
The wide range from top to bottom of the M-1 target "recognizes the considerable uncertainties that currently exist" about that measure of money because of the blurring of distinctions between checking and savings accounts at both banks and thrift institutions, Miller said.
Miller told the Banking Committee that the Fed's targets were consistent with the administration's forecast that GNP, in current dollars, will expand by about 9.75 percent between the fourth quarters of 1978 and of 1979.
Sinai using the DRI econometric model to analyze the Fed's targets, confirmed that, but said they were also consistent with the DRI forecast of higher inflation and a recession hitting late this year.
A given level of money growth can support a given expansion in so-called nominal GNP. But that increase in GNP can be comprised of different combinations of real growth and inflation. For that given increase in GNP more inflation implies less real growth.
"The absence of the sorts of distortions and imbalances that have often precipitated economic downturns in the past," Miller said, "indicates that it should be possible to slow the pace of expansion -- and thereby relieve inflationary pressures -- without prompting a recession.
"However, any further acceleration of inflation or the occurrence of severe shortages of critical commodities, such as oil, would imperil this outcome," Miller continued.
And he added, "Unfortunately, the price of imported oil will be boosted substantially this year as a result of the decisions taken by OPEC in December, and the unsettled situation in Iran raises the possibility of even larger price increases."
Miller earlier this year said he believes that inflation would be a bit worse this year than the acministration has forecast, and that real growth will be a bit less. Yesterday he declared there are "considerably greater uncertainties... with respect to the administration's goals for 1980... At this time the achievement of the out-put-price mix projected for 1980 appears to be more difficult."
Meanwhile, in Atlanta, President Carter told the Georgia Legislature that he is determined to hold the line with Congress on his 1980 budget. "The inevitable pressures to spend just a little more here or a little more there for someone's pet project or someone's favorite interest group, have begun," he said.
"I am determined to fight those pressures. I am determined to stand firm," Carter asserted.