President Carter's top economic adviser warned Congress yesterday against any "premature switch in economic policy," despite the growing signs of recession.
Charles L. Schultze, chairman of the Council of Economic Advisers, told a House subcommittee that any premature move toward stimulating the economy would only serve to step up inflation.
Conceding that the outlook for both employment and output was weaker than originally expected, Schultze told the committee, "We cannot . . . afford to change the basic course of economic policy at the first sign that economic growth is not proceeding along the lines we had expected."
Schultze, basically echoing earlier statements by the White House, predicted inflation would moderate below double-digit levels next year. "Food price increases have already moderated," he said. "The very sharp rate of increase in energy prices should also begin to slow in the near future."
The Carter administration is officially predicting an 8.3 percent inflation rate and an unemployment rate of 6.9 percent by the end of 1980.
Internal White House forecasts, however, are predicting a 9 percent inflation rate by the end of 1980 and unemployment at 8.2 percent. Treasury Secretary G. William Miller, who said recently that the current recession was already more than halfway over, is publicly talking of a 7.5 percent unemployment rate late next year.
While Schultze was predicting moderation in the nation's inflation rate, Henry Wallich, a member of the Federal Reserve Board, was telling a New York audience that interest rates may not have risen high enough to curb inflation.
Noting that even at their current record levels, interest rates were still lower than the rate of inflation, Wallich said, "It can be reasonable argued that interest rates that are negative in real terms are excessively expansionary."
Addressing a business outlook conference sponsored by the Conference Board, Wallich said that monetary policy "that allows real interest rates to be negative for prolonged periods strikes me as much more likely to stimulate rather than to restrain inflation."
The Federal Reserve Board, in a 4-3 vote, this week boosted the discount rate to a record 11 percent. The increase immediately triggered a boost in the bank prime interest rate from 13 to 13 1/4 percent, also a record.
Charles Partee, another member of the Federal Reserve Board, has publicly questioned the need to raise interest rates this far into a recessionary cycle.
That concern was echoed yesterday by Sen. Lloyd Bentsen (D-Tex.), chairman of the Joint Economic Committee. Bentsen called the new prime interest rate "a matter of serious concern."
Speaking at the same conference as Wallich, Bentsen said he hoped the Federal Reserve Board had "gone as far as they're going to go" in raising interest rates to curb inflation.