Gramley Resigns From Fed, Clearing the Way for a Reagan Majority

Times Staff Writer

Lyle Gramley, a strong member of the dominant “tight money” group on the Federal Reserve Board, announced his resignation Friday, clearing the way for Reagan Administration appointees to hold a majority in shaping the nation’s monetary policy.

The resignation of Gramley, along with a second vacancy expected early next year, could give the board a new political outlook that would be receptive to an expanded money supply and a faster pace of growth for the economy.

President Reagan already has appointed two members of the seven-member board, Vice Chairman Preston Martin and Martha Seger, both of whom have suggested that the Federal Reserve could allow the money supply to expand more rapidly without risking a new surge of inflation.

4-3 Majority Expected


This view has put Martin and Seger at odds with board Chairman Paul A. Volcker, who has warned repeatedly that inflation, while less threatening than a few years ago, is still worrisome and requires a tight money supply.

After Reagan replaces Gramley, an appointee of former President Jimmy Carter whose term did not expire until 1994, and Charles Partee, whose term ends in January, his nominees will enjoy a 4-3 majority on the board.

Gramley was a stalwart ally of Volcker, believing that the Fed should take strong steps to control inflation. Volcker, who enjoys immense prestige on Wall Street and in the business community, is the strongest voice in determining how fast the money supply grows, which in turn affects interest rates.

The movement of interest rates profoundly influences the sales of homes and cars, which are usually financed with borrowed funds. Business expansion, such as the buying of new equipment and the opening of new factories, also is linked to interest rates.


Clash With Volcker

Although Volcker, as chairman, is the most powerful member of the board, he may face a particularly difficult challenge in shaping the policy he wants when the Reagan majority is in place. The Administration firmly believes that a reduction in interest rates engineered by the Fed can stimulate business activity, generating jobs and profits, without overheating the economy.

Martin already has clashed with Volcker in an extraordinary show of discord for the Fed, which generally conducts its arguments behind closed doors. Last week Martin suggested to reporters that “innovative” ways be considered to solve the problems of debtor nations, including a possible cap on their interest payments. But his remarks drew an immediate rebuke from Volcker, who called them “incomprehensible.”

The Fed chairman has worked hard to arrange traditional solutions to the debt crisis, urging economic austerity by debtor nations so that they can earn enough money to help repay their bank loans. But Martin’s view, shared by some conservatives in Congress, is that the Fed’s current policy on the debt issue could impose economic hardship on these other countries, potentially lowering their standard of living and creating political unrest.


Leaving Sept. 1

Volcker’s public repudiation of Martin’s suggestion abruptly ended debate on the issue of international debt for now, but it could be revived when two more Reagan appointees join the board.

Gramley will leave Sept. 1 to become chief economist for the Mortgage Bankers Assn. of America, a trade group that includes 2,200 banks, savings and loan associations, insurance companies and other firms offering mortgage loans for homes and commercial properties.

He is a veteran of Federal Reserve service and had worked as a staff economist and later as director of the Fed’s research division before he was appointed to the board in 1980.


Gramley “is greatly respected throughout the (Federal Reserve) system as a policy-maker, economist and administrator,” Volcker said in a statement Friday. “To me, he exemplifies service to his government at its finest, and he has been a source of strength to us all.”