The Federal Reserve's tighter monetary policy announced last weekend will intensify the recession and push unemployment to 8 percent or more during election year 1980, several prominent economists predicted yesterday.
"The board's actions guarantee a recession" and risk "unemployment possibly in the 8 percent to 9 percent range," declared Otto Eckstein, head of the Data Resources economic forecasting firm.
The weekend actions included a major change in the way the Fed controls the expansion of credit. That change is expected to cause sharp increases in short-term interest rates today, when financial markets reopen after the Columbus Day holiday.
Michael Evans, a Washington-based forecaster, said the higher rates will put off the beginning of the recovery from recession until the third quarter of next year. "Consequently the unemployment rate will rise to a peak of over 8 percent by mid-1980," Evans said.
The present jobless rate is 5.8 percent of the labor force.
The prospect of higher interest rates boosted the value of the dollar on foreign exchange markets yesterday and helped drive the price of gold down to $372.50 an ounce in Zurich from Friday's $385.50.
The stock market fell, as it often does when interest rates rise. The Dow-Jones Industrials dropped over 13 points.
Treasury Secretary G. William Miller praised the Fed's actions in a speech to an American Bankers Association meeting in New Orleans. "By moving powerfully to assure better control over the expansion of money and credit, and to help curb excesses in commodity and other markets, the Federal Reserve will dampen inflationary forces and inflationary expectations . . . ," Miller said.
Miller also ruled out general tax cuts in 1980, saying that such "stimulative action" would "merely feed the fires of inflation." Details, Page F1.
Some economists, including Alan Greenspan, a former chairman of the presidential Council of Economic Advisers, and George Perry of the Brookings Institution, had been assuming a further tightening of monetary policy and so were not yet changing their forecasts. But they already were predicting unemployment close to 8 percent late next year.
The forecasters, whose personal philosophies range from liberal to conservative, all agreed that the Federal Reserve had no choice but to take some action against a new wave of speculation in financial and commodity markets.
Because of that speculation and worse-than-expected inflation, "you really need higher interest rates now to move the economy the way we thought it was already moving two or three months ago," said Brookings' Perry. The steady increase in rates in the last two months simply did not have enough bite on borrowing, he said.
Evans said the prime rate -- the interest rate banks charge their most credit-worthy customers -- will likely rise from the record 13.5 percent currently to 15 percent by next month.
While everyone seemed to agree that rates would be going up sharply, no one, not even Federal Reserve officials, were sure exactly how much. The reason for much of the uncertainty is that the Fed has moved into uncharted policy waters.
As of today, when the markets reopen, the Fed will try to control the level of bank reserves directly, and thereby gain what Federal Reserve Chairman Paul Volcker termed "surer control" of the expansion of the money supply. Reserves are the portion of deposits that must be set aside before loans can be made.
In the past, the Fed has sought to keep interest rates relatively stable, picking a level of rates it decided was consistent with the pace of expansion of the money supply it had targeted.
Now short-term interest rates will be free to fluctuate, while the stability is supposed to occur in the rate of increase in bank reserves.
At least that is the intention. "The question is," said one Federal Reserve official, "can we technically do it?"
The full impact of the policy changes will not be known, Greenspan cautioned, until the Fed is faced with a very large increase in short-term interest rates, perhaps two full percentage points, and either sticks with its target for bank reserves or chooses to hold down the rise in rates.
"If they have the guts to stay with it in the face of that," he declared, "then this will be the most significant monetary policy change since World Warr II."
Added Eckstein, "There's no way to know for sure what will happen to credit. We are about to run an experiment."
But the prospect, in the view of the forecasters, is for a renewed slump in the economy before the year is out that, necessary or not, will be made worse by the Fed's actions.