Federal Reserve Chairman G. William Miller told the Senate Budget Committee yesterday that interest rates will remain high for months to come unless the economy plunges into a recession.
"I can't give anyone hope interest rates will be lower in the near future," Miller declared. "If we were to try to administer lower interest rates right now, it would be a disaster for the dollar... and could do tremendous damage to this country."
Miller, as in other testimony this week, said that he does not expect a recession to occur. But if one did develop, he promised that the Federal Reserve "would take action to moderate the downturn."
Meanwhile, the Commerce Department reported that the nation's economy, after adjustment for inflation, grew at a 6.4 percent annual rate in the fourth quarter of last year, somewhat faster than first thought.
Some forecasters, such as economist Alan Greenspan, expect frowth this quarter to turn out to be at a 4 percent rate or more.
The revised GNP estimate of $2,212.1 billion at an annual rate was $1.3 billion higher than the preliminary figure released last month. Personal consumption expenditures were revised up $2.9 billion and business investment in fixed assets up $1.1 billion. Federal government purchases were revised down $1.1 billion, net exports $0.9 billion, and inventory investment $0.8 billion.
The rate of inflation, as measured by the GNP deflator, was not changed by the revisions, remaining at 8.1 percent.
Miller told the committee he expects the economy to continue to expand in the first half of this year at about a 3 percent rate, but to slow down in the second half. The Congressional Budget Office, as committee chairman Sen. Edmund Muskie (D-Maine) noted, expects that slowing to turn into a recession.
If it did, Miller said, the Fed would not change its basic approach of trying to achieve slow growth, but added that the Fed would act in the face of a recession.
He urged the committee "to come down with an austere (budget) view and a deficit of no more than $29 billion" in fiscal 1980, which begins next Oct. 1. That is the deficit recommended by President Carter in his proposed budget.
And if a recession hit, Miller said it would be better to stick with an "austere" fiscal policy and let monetary policy deal with the problem.
But could the Fed shift its policy fast enough to avoid a recession altogether, Muskie wanted to know?
"There are limits to what monetary policy can do," Miller responded."We cannot fine tune the economy... we can dampen the high amplitude swings." Should consumers suddenly and unexpectedly stop the buying spree that helped generate that 6.4 percent rate of advance in the fourth quarter, that could cause a recession and there would be little the Fed could do to prevent it, Miller explained.
Miller stressed, as he did earlier this week before the House and Senate Banking committees, that slow growth will have to be maintained for years to come to lick inflation.
"We have to live with lower growth rates," he said. "We have to get inflation down over five, six or seven years."
"Fiscal policy needs to be directed in a clear and forceful way at the easing of inflationary pressures," he continued. "The implications of austerity, sacrifice and patience need not be minimized but instead should be recognized as a measure of our commitment in dealing with a most difficult problem."
Miller expects fairly strong economic growth in the first half of the year, in part, because of the strength of the fourth quarter. "While the surprisingly strong surge of real gross national product... is not sustainable nor even desireable," he said, "it did impart a good deal of momentum to activity that is likely to carry over into the first half of the year."
The upward revisions in GNP for the fourth quarter all involved actual sales as opposed to accumulating inventories. Business inventories rose only $7 billion in real terms, partly because of the unexpectedly strong sales. Unless sales figures suddenly turn sour, businessmen will continue to try to add to their stocks of goods to keep from losing customers -- adding another source of demand for production.
In other developments yesterday, the AFL-CIO and some of its affiliated unions plan to challenge in court the administration's right to withhold government contracts from suppliers who do not comply with President Carter's "voluntary" wage-price standards.
AFL-CIO President George Meany told a press conference, "The law is quite clear. The government can't impose mandatory wage controls." Meany added, "Our lawyers believe it's illegal."