Federal Reserve Board Chairman G. William Miller acknowledged yesterday that the Fed's campaign to raise interest rates as an anti-inflation measure could choke the economy, but he gave no indication the central bank plans to stop its monetary tightening.
In testimony before the Joint Economy Committee, Miller told the Hill panel, "I think we're going to be walking through a very narrow valley in the next few months," and admitted it "will take tremendous skill" to avoid crimpling the economy.
However, the Fed chairman offered no encouragement that the board soon might ease its upward pressure on interest rates, which some policymakers fear might push the economy close to a recession.
Miller told the panel he thought food price increases would slow in coming weeks, but "there is much less likelihood of any easing in the underlying inflationary forces" in the economy. He cited next year's scheduled increase in the minimum wage as one potentially inflationary development.
The Fed chairman also said he believes the recent speedup in inflation "raises profound questions in regard to the longer run." He said, "A good deal of the raise in interest rates this year can be attributed to the acceleration of inflation."
[Brookings Institution economist Arthur Okun said yesterday he fears a recession, possibly by the end of the year. Details on Page F1.]
Miller made his remarks as Wall Street continued to react to the Fed's latest action raising interest rates last week. In the wake of the Fed action, there were rumors that banks may soon raise the prime rate, the interest charged their most creditworthy customers.
Meanwhile, Miller ran into his first serious clash in Congress, almost losing his temper in an exchange with Rep. Henry Reuss (D. Wis), chairman of the House Banking Committee, over-congressional say on a minor Fed proposal on whether to pay interest to member banks.
After Reuss complained vehemently about a plan by the board to invite comments on its proposal instead of sending it directly to Congress. Miller blew up and admonished him: "You're telling me I can't send a memo without your permission. Well, that's no acceptable. I think that's enough."
The exchange, which occurred at the hearing of the Joint Economic Committee, of which Reuss is also a member, marked the first time the usually unflappable Miller has stumbled. During his first few months in office, the new Fed chairman has been given high marks for his poise.
Later in the afternoon, the Fed's seven-member board of governors acceded to Reuss, on Miller's recommendation, voting to send its proposals to Congress rather than try to put them into effect on its own - but not before Reuss had the last word.
At one point during the JEC hearing, Reuss chided Miller: "There you go with your 'I've been a corporate executive all my life and I make the decisions.'" At another, Reuss told the Fed chairman that " the Federal Reserve can go jump in the lake."
Miller sidestepped opportunities during the JEC hearing to comment on money and credit policy. At one point, he agreed with Reuss that the board should raise its upper limit for the growth in the narrow-defined money supply - but only as a procedural measure because it hasn't been able to say within the present limit anyway.
Miller also took a cautious view of cutting capital gains taxes as conservatives have urged. The Fed chairman said he though that while it might benefit the economy in the long run, it would cost the Treasury too much money in the first year or two, and thus bloat the budget deficit.
The flap between Miller and Reuss involved a Fed proposal to pay interest on the reserves it requires member banks to keep on hand in regional Federal Reserve Banks. The move is designed to try to stop the decline in Federal Reserve membership.
Miller earlier had hoped to begin the practice without seeking congressional approval, but Tuesday the Democratic majority on the House Banking Committee warned him not to attempt the move without specific legislation from Congress. The board meeting late yesterday was in part to discuss the issue.
After the mid-morning exchange with Reuss, the board changed an earlier draft of its proposal to accede to the Banking Committee's wishes. Federal Reserve attorneys had contended the agency had authority to begin paying interest without a mandate from Congress.