The nation, admits Frank E. Morris, president of the Federal Reserve Bank of Boston, has paid ''a high price'' for its battle against inflation. Unemployment is high. Thousands of companies have gone bankrupt. Billions of dollars in production have been lost.
But progress has been made against inflation. Prices rose only 0.4 percent in December, 0.3 percent in January, 0.2 percent in February, and when the consumer price index for March is released today, it is expected to show continued moderation. For instance, Mitchell J. Held, an economist at Smith Barney, Harris Upham & Co., predicts the figure for March will be about the same as for February.
If so, that's great news. Inflation will have been running at well under a 4 percent annual rate for four months.
Mr. Morris, who serves on the Federal Reserve's Federal Open Market Committee , which determines national monetary policy, is not about to endanger that gain against inflation by pushing for an easier monetary policy. Rather, he says, the Fed must ''hang in there'' for three or four more years.
''If we don't, we will be in even hotter water four or five years down the road,'' he warned in a recent telephone interview.
Most economists still reckon that an economic recovery will begin this spring. But for the Fed, the problem is that to most people, the economy feels even worse for several months after a recovery has begun. Though production has turned up, unemployment usually keeps climbing for some months. Bankruptcies continue at a fast pace. Political complaints become more heated. And criticism of the Fed and its policies mounts.
The Federal Reserve gave in to such pressures for an easier monetary policy after the 1973-75 recession. Liberal economists in the Carter administration and outside of it argued that because of the great slack in the economy, the Fed could pump out more money without prompting much greater inflation. High unemployment rates and slack industrial capacity would keep wages and prices down.
Monetarist economists, those who believe the growth in the supply of money to the economy determines both the business cycle and future price levels, warned that inflation would rekindle and worsen. They were right. Inflation climbed to a 13.3 percent rate in 1979.
This time the Fed is determined not to repeat that mistake.
''We simply have to hold the line,'' Mr. Morris said. The Fed's announced intention is gradually to reduce the rate of growth of the nation's money supply -- the fuel for the economy - over the next few years until inflation is greatly reduced.
After the 1970s experience, hardly any economist is urging the Fed to loosen the monetary reins on the economy dramatically. That position has been discredited.
But there are finer differences. For example, Howard J. Howe, a vice-president of Wharton Econometric Forecasting Associates Inc., Philadelphia, advocates a slight increase in the money supply above the Fed's targets. For instance, he would like to see M-2 (a broad measure of money) grow 9.8 percent this year, 1 percent above the Fed's target ceiling, and 10.7 percent in 1983, 2 percent above what Warton expects the Fed to permit.
This change, he argues, is modest enough that the financial markets wouldn't panic, figuring the Fed had thrown in the towel in its fight against inflation. But it would be enough, he says, to bring down interest rates in 1983 by 1.7 percent. Further, it would lower the federal budget deficit by some $30 billion in 1984 and 1985 by stimulating the economy somewhat.
He maintains the change wouldn't add much to the inflation rate.
Mr. Howe accepts the common view in the financial markets that once recovery gets well established, interest rates will start moving up again as business needs more financing for its increased activity.
In recent days, interest rates have been headed down. The prospect of a budget compromise between the President and Congress has offered the money markets hope that the federal government will need less financing for its deficit in the future.
The Boston Fed's Mr. Morris also sees the need for a declining deficit by the time the economy starts expanding more rapidly. Otherwise, he says, the nation faces continued high interest rates as the Treasury and the private sector compete for available credit -- a credit supply that will be growing even slower as the Fed continues its policy of ''monetary gradualism.''
''I have never seen the Federal Reserve System in such a determined mood to finish its job,'' he says.
If the market becomes convinced of this, that the Fed will not give way in its battle against inflation despite the costs, then, he predicts: ''We are going to see the biggest rally in the bond market this country has ever had.'' But Mr. Morris doubts that Wall Street's skepticism will be overcome very shortly.
Because of the Fed's determination to hold the line on money, most economists are expecting the recovery to be modest. Wharton's ''baseline forecast'' -- the one it considers most likely -- calls for real growth in gross national product (GNP) of minus 1.4 percent this year (it doesn't expect the recovery to begin until this summer), and plus 3.9 percent next year. The administration predicts plus 3 percent this year and 5.2 percent next year.
GNP did drop at a 3.9 percent annual rate in the first three months of this year. But economists offer the assurance that recovery will start soon - either about now or within a few months.