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."
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."
One result of this clash, he says, will be high interest rates.
Another reason for continued high rates will be slow progress in beating inflation. The slowing rise in the consumer price index in recent months exaggerates the progress, he says.
"There has been an oil glut and the price of oil has been edging down. We have also been fortunate that food prices have been relatively stable. We cannot assume these trends will continue."
Nonetheless, he does see some progress in the battle against inflation with the so- called "core rate" slipping slightly below 9 percent. The key to further progress, he reckons, is an upturn in productivity (not likely, in the short term, with a slowing economy) and a downturn in the increase in wages. As the economy softens, he adds, wage increases should diminish in size.
Morris suspects that the Fed's anti-inflation monetary policy has been winning credibility in the money markets recently. Money-market participants had been expecting the Fed to back off some and allow interest rates to decline. But it did not, and the commercial banks' prime rate rose again last week to 20. 5 percent.
Moreover, the latest statistics show the basic money supply dropped $1.3 billion in the week ended July 1 and has indeed declined for two consecutive months.
"Beryl is happy," Morris says, referring to Beryl W. Sprinkel, the Treasury's undersecretary for monetary affairs, who is a keen believer in tight control of the nation's money supply. The Fed has been getting strong support from the Reagan administration for its tight monetary policy, and Morris comments. "This has got to be a help" for the Fed's ability to maintain its anti-inflation stance.
Morris recognizes the problem West European nations have with current high interest rates in the United States -- a hot topic at this month's economic summit meeting in Ottawa. He admits it forces West Germany and other nations to follow a more restrictive economic policy than they would otherwise. Moreover, the resulting strength of the dollar has made imports -- particularly oil -- more expensive for the Europeans. "Germany has had a third oil shock. Oil prices for them are up 40 percent."
"The Europeans are never terribly happy about United States policy," he went on. "If we followed a low interest policy and weakened the dollar, they would be unhappy. They don't like it when the dollar is weak and when the dollar is strong.
"But they would agree that a strong dollar is a healthy factor for the international system, even though it may require some countries to make some adjustments they would rather not make. Certainly our inflation rate, because of the strength of the dollar, is lower than it would have been otherwise."
The Fed, Morris indicated, will not abandon its strict monetary policy because of either domestic or foreign critics.