Fed official, hailing upturn, says inflation fight goes on
Frank E. Morris was watching ''the wire'' on the computer screen in his office and saw that the Dow Jones industrial average was up some 15 points. Mr. Morris, president of the Federal Reserve Bank of Boston, was delighted.
''Financial strength,'' he said, ''has to show through in real strength down the road.''
In other words, this senior member of the nation's monetary policymaking body sees the upturn in both the stock and bond markets as a precursor to economic recovery.
''What we need to get the economy going is to get the cost of capital down - both debt and equity,'' he said in an interview. ''That high cost has been restraining the economy in recent years.''
Several top Federal Reserve officials spoke in recent days to this reporter of their pleasure with the upturn in the financial markets. All but one Fed bank president were surprised at the depth of the recession and the slowness of the recovery. The exception said he had been telling his bank's economists since last winter that the recovery would be delayed.
Another regional bank president gloomily likened the economy to a swimmer standing on the bottom of a lake, trying to swim up, but not yet moving. Now the financial markets offer a change with some good news.
Moreover, as Mr. Morris put it, ''The stock market is a very good barometer as to investors' confidence in the future.'' It reflects a growing view that the Fed will go on limiting inflation.
''We have got someplace,'' Mr. Morris said.
The Boston Fed official wanted to clarify what he called some ''misconceptions'' about the Fed decisions made at last week's meeting of the policymaking Federal Open Market Committee in Washington.
* ''We have certainly not given up on the high priority we attach to inflation control,'' he said. ''We do not consider our priority has been weakened at all. There is no sense on the part of the committee to say that, now we have got to get employment up, our mission to control inflation is going to take a back seat.''
In fact, he doesn't see ''much leeway'' in the fight against inflation.
* The Fed is not going back to its pre-1979 policy of determining monetary policy by watching interest rates. It will continue to base monetary policy on the growth of the money supply - the ''monetary aggregates.''
He said, however, that the Fed ''has eliminated M-1 as a target for technical reasons.'' M-1 is the sum of currency in circulation and checkable bank deposits. Rather, he added, the Fed will maintain and watch its targets for M-2 and M-3, which are larger measures of money supply.
''If these are growing at a rate that is incompatible with controlling inflation, we would have to do something about it,'' he warned. The implication was that the Fed would not hesitate to tighten the reins on monetary policy once more, should the aggregates grow too rapidly.
He noted that during August, M-2 and M-3 ran well over target, but growth had moderated in September, bringing them ''closer to target.'' He did not seem bothered the two aggregates were somewhat above target.
''The press doesn't pay any attention to M-2 and M-3,'' he said. ''I assume they will in the future.''
As for the status of the economy, Morris sees ''no sign in the data'' yet that the economy is turning.
''We had to get a turn in the financial markets first,'' he said. ''We have had a tremendous move in interest rates.''
Triple-A utility bonds, he pointed out, had a high this year of 16.34 percent. By last week they were down to 12.7 percent. Yields on primary conventional mortgages reached an average high of 17.66 percent this year. Now they are around 15 percent. Long-term Treasury bonds with 14 percent coupons sold for $93 not long ago and are now almost $129.
Morris expects corporations to move into the bond market in a major way to improve their capital structure by turning short-term debt into long-term debt.
The outspoken Fed bank president doesn't expect the recovery to be as strong this time as after a typical recession. ''We need a moderate recovery that is sustainable,'' he said. He expects growth in national output in 1983 to be perhaps 3 or 4 percent. And he figures inflation will fall for another year or so, as it usually does for some period into a recovery.
One factor in reduced inflation, Mr. Morris says, will be strong gains in productivity.
''The corporate sector has cut out a lot of fat in the last three years,'' he said. ''And they have worked out less restrictive work rules with the unions. That should help.''
He admitted a high productivity gain ''means the unemployment rate will not come down very dramatically. But it will ease down.''
What this boils down to is that the Fed has eased up at the moment to get the economy off the floor and, it hopes, into a recovery ''before the end of the year.'' But it is still sticking to its anti-inflation goal, even if that means tightening up on money later.