Federal Reserve Chairman G. William Miller told a Senate Foreign Relations subcommittee yesterday that the U.S. economy is slowing down to a more moderate pace of activity and that "the slowdown will continue through the balance of the year."
But Miller vigorously denied that the economy would enter a true recession - a period of negative growth rates - or that a recession would be a good thing for the nation.
Asked by Sen. Paul Sarbanes (D-Md.), subcommittee chairman, to comment on Herblock cartoon in yesterday's Washington Post, showing an adviser telling President Carter, 'The good news is that our economists think a recession may be under way,' Miller said:
"My response is one of sadness that we haven't come far enough in our understanding of economics. A recession would not be good news, but bad news . . . The good news, is that we're not going to have a recession, but a pause and a consolidation."
A recession would throw people out of work, boost the federal deficit, and create a demand for new spending programs, the central bank head declared.
Miller said the slowdown he foresees will enable the economy to "catch its breath," and allow officials to plan for "a return to more sustained growth."
In response to questions later, he said he would prefer "an investment stimulus to lead us out on the supply side," rather than boosting consumer spending. The major investment tool he recommended was accelerated depreciation, rather than an investment tax credit, which he termed "very expensive."
Miller's views tallied with recent expressions by the Carter administration. The president told the National Cable Television Association Wednesday he believed "the general economy is slowing down somewhat." And Economic Council Chairman Charles L. Schultze told the Senate Appropriations Committee yesterday that the economy can make the transition to slower growth without incurring a recession partly because the U.S. hadn't had "speculative overbuilding."
Miller said the objective of Federal Reserve monetary police has been to slow the growth of the economy on an orderly basis "without placing an undue burden on any sector of the economy" or "without going into a recession."
Miller had resisted Carter administration overtures some weeks ago - which then were abandoned to make monetary policy significantly tighter, although the Fed appeared to have edged the basic federal funds rate from about 10 per cent to 10 1/4 per cent.
He gave no clues on any actions Tuesday by the system's policy-setting Open Market Committee. But the money markets appear to believe that the federal funds target rate was left unchanged, and that in general, the Fed's approach continued to be to maintain a steady policy.
On international questions, Miller said the nation's trade and current account (services plus trade) balances would benefit this year and next "from a stronger dollar." He estimated the current account deficit would be reduced to $10 to $12 billion this year from $16 billion last year, and "will be near a balance," in 1980.
Coincidentally, Carter told the newly reactivated Export Council that the dollar's long-range stability depends on the trade outlook. Citing the probability of a $10-billion reduction in the trade deficit this year. Carter said the dollar won't be permanently stabilized until the nation's trade deficit is erased.
The Export Council, which will advise Carter on international trade, and help to sell Administration policies here and abroad, passed a resolution endorsing the Multinational Trade Agreement, which Carter said would get top legislative priority this year.
Carter said that the U.S. must expand its export to help balance its international trade accounts.
In hearings Tuesday before the Sarbanes subcommittee, Treasury Secretary W. Michael Blumenthal had estimated a reduction in the trade deficit this year by $7 to $8 billion, to a level of about $26 billion.
In related testimony yesterday Undersecretary of State Richard Cooper singled out the U.S. dependence on "costly and unreliable" sources of imported oil "as the chief single source of inflation which hurts our citizens every day in the domestic marketplace."
Sen. Jacob Javits (R-N.Y.) raised the question of the impact of cartel oil price hikes on the credit status of less developed countries, noting that their aggregate balance of payments deficit for 1979 is estimated to rise to $30 billion.
Miller responded that it is "a very, very important issue." He said the LDC debt burden is "significant," and in the medium term, those countries will need access to private loans. But Hiller didn't cite particular countries that may be in trouble. Private bankers do not see a general crisis, but point to Turkey, Zaire and Peru among "soft spots."