Fed is firm on tight money, Boston official says
Will the Federal Reserve System relent on its tight-money policy? No way, says Frank E. Morris, president of the Federal Reserve Bank of Boston. "We have got to go through a period of slow growth so that you get enough slack in the economy and enough pressures to force interest rates down. That process takes a good deal of time."Skip to next paragraph
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Mr. Morris sat through last Monday and Tuesday's meeting of the Federal Open Market Committee, the group of seven federal Reserve governors and five regional Fed bank presidents which determines the nation's monetary policy. (Four of the committee slots rotate among regional bank presidents. This year Mr. Morris does not vote.)
At that meeting, the committee decided on preliminary targets for growth in the nation's money supply in 1982. Morris did not want to scoop Fed chairman Paul A. Volcker by announcing those targets before Mr. Volcker provides the House and Senate bankings committees with this information at hearings early next week. But during an interview in the Boston Fed's modernistic office building here, Morris indicated that the targets would be lower than the current ones.
"There is a recognition that if we are going to control inflation, we have got to keep the economy in check," he said. "We have to reduce the growth of the money supply gradually. This will put limits on growth."
Morris figures the economy is already slowing as a result of current high interest rates. He sees a weak economy -- not a big recession. The demand for loans in the banking system has remained "pretty big." But some of this demand has been to finance growing inventories -- "a sign of weakness, not of strength." Retail sales are on the weak side. Employment has leveled off after rising sharply earlier this year.
The Fed bank president believes the public today is willing to make some economic sacrifices in the battle against inflation. "The public mood has changed," he says. Today's high interest rates would have caused an enormous hue and cry from the public some years back.
"The public understands this is the price you have to pay if you want to give priority to getting inflation down."
But Mr. Morris wonders if the public recognizes that the Federal Reserve will have to maintain financial pressures on the system for a long time, that interest rates could remain relatively high for an extended period. Will the public become impatient? he asks.
"If I am right [about the economy's slowing]," he continues, "we are pretty close to a peak in interest rates. We should soon see some downtrend." He does not expect rates to plunge as fast or low as they did in the spring of 1980, however.
One reason is that the financial markets do not see a balanced federal budget on the horizon. "I think the budget deficit in fiscal 1982 is going to be larger than this year's," Morris predicts. "The expansionary thrust of the tax cuts and the increase in the defense program, minus the substantial cuts in civilian spending, means you will end up with an expansionary fiscal program. That is going to run head on to a restrictive monetary program."