Fed stands firm against 'unlocking economy' with easier-money keys
Boston — Federal Reserve System officials have been flooded lately with thousands of keys. They come from representatives of the home building and automobile industries calling upon the central bank to ''unlock the economy.''
The keys have not opened any monetary doors. The Federal Open Market Committee (FOMC), the monetary policymaking body of the Fed, met Tuesday and decided not to relent in its battle against inflation.
''Our resolve remains firm,'' said Willis J. Winn, president of the Federal Reserve Bank of Cleveland, in a telephone interview. He is a voting member of the 12-member FOMC this year.
This was confirmed by another Fed official in a background conversation and by the text of a speech scheduled to be given last evening by Lawrence K. Roos, president of the Fed branch in St. Louis. This year Mr. Roos sits through FOMC sessions, but does not vote.
The thought of Fed officials buried in keys, Mr. Roos said, ''may be momentarily amusing.'' But ''current criticisms of monetary policy are ill-directed.'' He held that any attempt of the Fed to accelerate monetary growth would be ''of little avail in bringing relief to the auto and housing industries, or, for that matter, to any other parts of the economy.''
Those sending keys, he noted, may believe that slower money growth drives interest rates up and faster money growth pushes interest rates down. But a ''vast amount of empirical evidence'' shows just the opposite: Faster money growth brings higher interest rates, and vice versa.
There appears to be a consensus on the FOMC that:
* The recession may be somewhat deeper than anticipated, but not yet dangerous.
''I don't expect it to be abnormal in magnitude,'' said Mr. Winn. But he does admit to watching the economic slowdown carefully for any signs of acceleration.
* The fall in interest rates has been rapid enough that the FOMC does not feel the need for an immediate further drop in the discount rate it charges commercial banks on loans to cover reserve requirements. Discount changes are often regarded as signals of Fed monetary policy.
The Fed, it was indicated, would watch trends both in the money supply and in the economy as a whole before it acted again on the discount rate.
* For the moment, Fed officials are reasonably happy with trends in the ''Ms'' - the various measures of the money supply. ''M-1B adjusted,'' one measure, is running below the Fed's target range. But M-1B is just within the lower end of its target range, and M-2 is just within the upper end of its target range.
Winn complained, ''When you look at the measurements, it is like looking at a thermometer that is broken.'' He figures M-1B adjusted understates the ''transaction balances'' in the economy - that is, the financial accounts that are used to buy goods and services. Economists regard the amount of ''money'' available for transactions as crucial to future growth and inflation trends in the economy.
* Fed officials feel very much alone in the battle against inflation. They do not count on Congress doing much more to trim the federal budget deficit.
''Fiscal support will not be there,'' Winn said.
He said one reason for a weakening of congressional resolve to tighten up the budget could be the ''economic environment'' - in other words, the recession. Another excuse could be the ''Stockman episode.'' An article in the Atlantic Monthly indicates that David Stockman, head of the Office of Management and Budget, had early doubts about the possibility of trimming the budget deficit as much as the Reagan administration forecast.
''There is still a big challenge in the fiscal area,'' Winn said.
The Cleveland bank president is concerned that housing sales may not snap back as fast as hoped once interest rates come down. Demographics (the arrival of the baby-boom generation at the key house-buying age) and the slow rate of new home construction in the last few years should increase demand sizably, he noted. But he wonders if the public will accept variable-rate mortgages and, if not, whether the thrift industry will once more provide fixed-rate mortgages.
Winn is also worried about the auto industry, with its severe competition from imports. Even when interest rates decline further, the domestic firms must still overcome the sales obstacle of high prices and a ''perception'' of poor quality - which, Winn says, may be better than perceived.
But can the Fed help out by shoving interest rates down?
''There is not much we can do about that,'' he replied, adding that the public tends to forget that interest rates reflect underlying economic conditions.
In other words, the keys haven't changed the Fed's mind.