The chairman of the Federal Reserve Board said that the nation's central bank intends to continue to pursue the restrictive monetary policy it has followed for the last year "until we are sure the economy is in a cooler state."
G. William Miller noted today that although the traditional measures of the money supply have decined or shown little growth in the last four months, they no longer are good indicators of the amount of funds sloshing around in the economy that can be loaned to companies and individuals.
Until the Fed is sure that the availability of credit is being trimmed, the central bank will keep monetary policy in a "restrictive" stance, Miller told the annual meeting of the American Paper Institute.
Although Miller did not say what "restrictive" meant, presumably Fed policy over the coming months will keep interest rates at the current level or higher.
Short-term interest rates declined during the early weeks of the year as loan demand fell, in part because companies were cash-flush after a surprisingly strong 1978 fourth quarter, and in part because rough weather in January and February slowed operations and reduced corporate borrowing.
But rates have begun to climb in recent weeks, and one of the banks that lowered its prime interest rate from 11 percent to 11 1/2 percent, First National Bank of Chicago, has boosted the rate back to 11 3/4 percent.
Miller noted that economists of all stripes -- both the so-called Keynesians and the monetarists -- have advised the central bank to loosen its monetary policy.
"We're not going to follow either one," he said.
Miller said that corporations and individuals have developed many substitutes for money in recent years that do not show up in the conventional definitions of the money supply -- currency in circulation and checking deposits. That means the money and credit situation is not as tight as the old indicators suggest, Miller said.
Miller said that both those who forecast a strong boom -- which eventually will end in recession -- and those who foresee an imminent recession are wrong. "The evidence is that the economy is slowing and headed for neither a boom nor a bust," Miller said.
But he suggested that if the central bank has any worries, it is that the economy is too strong. He noted that "recent evidence suggests that businessmen may be tending" to hoard materials as they did during the inflation boom just before the 1974 recession.
If they are, he said, it would set the stage for plant and factory closings as companies realize they have too many goods in inventory and cut back orders.
"Let's not repeat 1973 and 1974 when (business) greed in trying to accumulate goods led to a disastrous recession," Miller admonished.
He promised that monetary policy would be prepared to move "promptly" toward either more restraint or a loosening if the economy should show signs of growing too fast or suddenly shrinking.
At a press conference following his speech, he said that, while the Fed does not want to stop foreign banks from taking over any American banks, he doesn't think a foreign bank would be able to take over an American bank that did not want to be acquired.
"They'd have a long road to hoe and an unlikely outcome," Miller said.