President Carter's top economic advisers have researched agreement that they must risk a deeper recession if necessary in order to slow the overheated economy.
Officials say some sort of major policy tightening is likely to come in the next two or three weeks, barring any last-minute signs of new slowing.
"We can't wait until May," one key adviser says.
The moves the administration is considering include two major options:
Asking the independent Federal Reserve Board to raise interest rates dramatically-perhaps by a full percentage point or so-in hopes of crimping business inventory-builing.
Ordering imposition of credit controls to dampen demand for big-ticket items. For example, authorities could prohibit four-year auto loans-a move that likely would cut back new car purchases.
The high-level consensus stems from a series of new economic statistics in recent weeks-the latest last Friday's unemployment report-which show a continuning boom in the industrial sector that is exacerbating inflation.
Top Carter officials had hope to see the eonomy taper off a bit last month, but except for some modest easing in housing and consumer spending, activity is continuing at a too-rapid pace.
The fear on the part of policymakers is that if the overheating continues even a few more months, it could seriously worsen the underlying inflation rate, making the price spiral substantially harder to lick than it is now.
Until this past week, top Carter advisers had been split over the issue, with some fearful that too much tightening now might risk a recession later this year. The White House still believes there will not be a recession.
But in the wake of last week's figures, all Carter's top advisers are convinced that the threat of a true runaway inflation spiral far outstrips the risks of a somewhat deeper downturn later this year.
Both Treasury Secretary W. Michael Blumenthal and Charles L. Schultze, chairman of Carter's Council of Economic Advisers, are persuaded the administration, must act soon to cool the overheating.
The only major question is what to do.
The big problem facing policymakers is in the timing of any new action. Further cuts in spending would not have any impact until mid-1980-too late to help in the current emergency. They also might backfire in a later recession.
Simliarly, there usually is a lag between tightening of money and credit policies and the time they begin affecting business activity. And in the current environment, no one knows how big a cut is needed.
The two options the administration is considering-increasing interest rates and imposing credit controls-also present some "lag" problems, but they are not nearly as big as broader policy shifts would entail.
But policymakers say their main purpose in ordering them would be as a psychological move-to "send a signal" to business and consumers that the White House is serious anout the inflation fight.
The administration took a similar step in Novemeber, when it urged the Fed to raise interest rates to help shore up the dollar. The move worked after traders saw it as a sign that policymakers were concerned.
Raising interest rates also would have another effect: It would discourage businesses from borrowing to finance unnecessarily large inventories, which now are contributing to the overhearing.
Some economists are fearful that a continued buildup of excess inventories could lead to distortions in the economy similar to those that helped bring on the 1974-75 recession. The situation is not that serious yet.
The current round of overheating initially came as a surprise to economists, who had excepted the economy to slow late last year and then head into a gradual downturen. Meanwhile, inflation was supposed to abate.
But, as economists explain it in hindsight, behavior patterns changed to give lie both to the growth and inflation forecasts:
Both consumers and business began reacting to the higher inflation rates by buying as much as they could to beat future price increases. Business began an unexpected surge in capital investment.
To top it off, the Fed's rise in interest rates did not have the impact it would have had a few years ago in dampening activity. Borrowers merely forged ahead, confident the high rates would prove to be bargains later.
The rub came when the overheating began to exacerbate inflation. Before January, the major offenders had been farm and energy prices. Later, raw materials jumped-notably for leathers and nonferrous metals.
There also was the danger that businesses would raise prices to beat mandatory wage-price controls which they seemed convinced the government would adopt. But policymakers figured all this would be checked if demand remained sluggish.
When the economy began overheating, however, the lid blew off on the price side. In the face of excess demand, producers were able to get whatever price increases they sought, and prices began soaring.