Fed's man in Boston warns economy is growing too fast. Surprised that markets have not reacted more to interest rate hikes
Frank Morris has been making monetary policy in the United States longer than anyone else, and he is concerned about inflation. Mr. Morris, president of the Federal Reserve Bank of Boston, says: ``We really have an economy that is getting pretty stretched out, in terms of manpower and industrial capacity. It is in this sort of environment that inflation begins to sprout.''
He wants economic growth to slow down a bit.
As a Fed branch president, Mr. Morris attends the meetings every month or so of the Federal Open Market Committee (FOMC). That body, which also includes the seven governors of the Fed, determines the nation's monetary policy. It raises or lowers short-term interest rates and increases or decreases the supply of money to the economy. Many economists say it is the Fed that forces the economy into a recession, prompts a boom in business activity - or keeps growth moving along on a reasonable path.
On a rotating basis, four of the 12 branch presidents vote on the FOMC each year. A fifth, the president of the New York branch, always has a vote. Mr. Morris isn't a voting member this year. As senior member of the FOMC, however, taking a seat in 1968 when William McChesney Martin was chairman, his views invite special respect.
Morris figures the Fed has been supplying only a ``modest'' amount of money to the economy. One money measure, M-1, shows a 4.6 percent growth rate; a broader measure, known as M-2, 5.8 percent. ``These are not numbers that would frighten anybody,'' he said in an interview. Nor is he bothered by the current inflation numbers.
``But a central bank has to be forward-looking and realize that the impact of its actions on the economy are felt with a considerable lag,'' he says. ``Everybody in the Fed is concerned about the risk of a new inflationary cycle getting started. We are watching the situation very closely.''
Morris seems somewhat surprised that the markets - for gold, bonds, and the US dollar - are not so ``uptight'' about inflation. The Fed, he notes, has already boosted short-term interest rates to the same level as before the October stock market crash in an effort to dampen business activity.
Despite this, the economy has been growing at faster than a 3 percent annual rate in the first half in real terms. Morris argues that a sustainable, noninflationary rate of growth for the American economy is more like 2 percent, or, at the most, 2.5 percent. That follows from a 1 percent growth rate for the labor force plus a 1 percent growth in productivity.
``We have got to move to a slower growth rate,'' he says. ``The economy looks too strong, not too weak. There is no basis for forecasting a recession in 1989.''
Statistics for July showing a surge in employment of 283,000 on top of 532,000 in June are worrisome for Morris, showing the economy ``stronger than we would want to sustain from the standpoint of inflationary pressures.''
Morris recalls the Fed's policy mistake in the last half of the 1970s, when the bank thought the economy had more room to grow without inflation than proved to be the case. The result was double-digit inflation.
He doesn't want a repeat of that policy error. But he sees no evidence yet of slower growth ahead. Rather, he finds, the government's main leading indicators (figures released Aug. 2) are pointing to rapid growth ahead.
``We can't permit the economy to grow in excess of 3 percent for terribly long without doing something about it,'' he says. ``We have to be cautious.''
The Boston Fed official is proud of the length of the present economic expansion - six years come November. He is pleased that manufacturing employment is back up to the same level as in 1984 and that lower unemployment rates have meant jobs for some of the disadvantaged in the nation. But he maintains that permitting too fast growth would do the unemployed no favor.
``We could end up with a situation where we have a choice of having accelerating inflation or having a recession,'' he says. An economic slump would put more blacks, Hispanics, the less-educated, as well as others, out of work.
Morris, when asked for an evaluation of Alan Greenspan, described the New York economist appointed by President Reagan as chairman of the Fed a year ago as ``a great numbers cruncher'' - more so than his predecessor, Paul Volcker. ``He is always coming up with insights into the economy he has picked up from some set of numbers.''
Mr. Greenspan, Morris continues, ``is extraordinarily adept at handling people.'' He makes sure all the FOMC members contribute to the policy discussions. As a result the committee is ``very collegial.''
Moreover, Greenspan is ``a bit more diplomatic'' in presenting the Fed's policy to Congress and responding to committee questionings, Morris says. Some congressmen feel he is less evasive than his lanky predecessor.
Morris notes, though, that Greenspan is capable of the ``needed ambiguity'' in talking of monetary policy, so much so that New York Times and the Wall Street Journal correspondents interpreted his testimony to Congress last month in opposite ways. ``That is really masterful,'' he said with a chuckle.
Morris also praised Greenspan for the way he dealt with the October stock market crash.
For two weeks, he noted, Greenspan had a daily conference call with the Fed branch presidents to get any reports of financial trouble.