Battle May Be Shaping Up at the Fed : Reagan Appointees Will Be in Majority for the First Time

Overshadowed by the towering presence of Paul A. Volcker, their 6-foot 8-inch chairman, the six other governors of the Federal Reserve Board generally labor in quiet obscurity. Comfortably ensconced at the helm of the nation’s central bank for up to 14 years, they help shape--through the Fed’s influence over interest rates and the money supply--such crucial economic forces as inflation, unemployment and the prospects for growth or recession.

Now, with President Reagan scheduled to name two new Fed governors over the next few months, his appointees will constitute a majority on the board for the first time, and Volcker’s control of the Fed is widely considered to be in doubt. Some Administration officials go so far as to suggest privately that Volcker may see the handwriting on the wall and resign.

Indeed, the prospect of gaining control over the Fed has ignited a pitched battle over who should replace Fed governors Lyle E. Gramley and Charles Partee--both Volcker loyalists--when they leave. Contending for influence over the nominations are two conservative economic camps: supply-siders, who generally favor increasing the nation’s money supply to spur faster growth, and monetarists, who want to see the reins held snug.

But don’t count Volcker out yet, Fed insiders say. The redoubtable chairman is not without resources. And those most knowledgeable about his thinking are convinced that he has no intention of letting the Reagan Administration subtly pressure him into leaving early.

“People who think Volcker can be forced into early resignation just don’t read Volcker right,” said Partee, who will retire at the end of January. “That kind of challenge is likely to convince him to stay.”

And Volcker will retain formidable assets even after Reagan appointees constitute a majority on the Federal Reserve Board itself. Reagan’s four appointees are unlikely to vote as a bloc, and even if they did, Volcker could still retain working control over monetary policy. Volcker has been installing proteges as regional Fed presidents on the 12-member Federal Open Market Committee, where nearly all of the key decisions are made. Moreover, the Fed chairman by tradition has enormous power and prestige within the institution.

If Volcker stays, Wall Street should breathe a sigh of relief. The Fed chairman is viewed as the main bulwark against a return of inflation. Given the confidence of investors both here and abroad in Volcker’s stance, the Fed has actually had the leeway to allow the money supply to grow far above its own targets all during 1985, a move that might normally have revived widespread fears of future rising prices.

Given High Grades

The Fed’s policy has helped sustain the flow of foreign money into the United States, which has enabled the federal government to finance its deficit without imposing unbearably high interest rates.

“Paul Volcker is the backbone of this whole economy,” asserts Sen. Bill Bradley (D-N.J.), “and if he were to go, you’d see some of this (foreign) capital--whatever the interest rate--flee.”

Political economist Michael Barker, editor of “Politics and Markets,” recalling the famous aphorism used by several French leaders about the flood of troubles that country would face once they stepped down, says, “If I were Volcker, I’d have a sign on my desk: ‘Apres moi, le deluge.’ “

Others, however, are bound to be disappointed if Volcker stays.

For one thing, he is blamed by some in the White House for the yearlong economic slowdown. These critics hope he will become so uncomfortable once the new members join earlier Reagan appointees Preston Martin and Martha Seger on the seven-member board that he will resign well before his term as chairman expires in August, 1987.

Beyond questions about Volcker’s performance, there are some who simply hanker after his job.

White House chief of staff Donald T. Regan has occasionally hinted that he might like to become Fed chairman, and his position right next to the Oval Office presumably would give him an advantage when Reagan made a choice. When he was Treasury secretary, Regan opposed Reagan’s decision in 1983 to reappoint Volcker to another four-year term as chairman, but the White House went ahead anyway because of worries about negative reaction in the financial markets if Volcker left.

However long Volcker decides to remain as Fed chairman, the behind-the-scenes campaigning is already well under way for the job that Rep. Jack Kemp (R-N.Y.), a Volcker critic, calls the “second most powerful position in Washington.”

Martin, vice chairman of the Fed, and Alan Greenspan, key economic adviser to both President Richard M. Nixon and President Gerald R. Ford, are considered the most active contenders for the Fed chairmanship. Administration officials downplay Martin’s chances, but “Greenspan has a shot because he is seen as the candidate of the Fortune 500,” one White House official said.

Others who have been mentioned as possible replacements for Volcker include Secretary of State George P. Schultz, whose background is in economics, and Walter B. Wriston, retired chairman of New York’s Citicorp, the nation’s largest banking company.

Gramley, Partee

The White House’s more immediate problem, however, is to choose successors for Gramley, who resigned Sept. 1 to become chief economist for the Mortgage Bankers Assn, and Partee, who will leave in January.

One of the vacancies, probably the one that will open up next year, is expected to go to Manuel H. Johnson, currently assistant Treasury secretary for economic policy, a supply-sider who is regarded as more pragmatic than such outspoken exponents of slashing tax rates and lowering interest rates as Paul Craig Roberts, his predecessor at the Treasury Department.

But Administration advisers are divided over the replacement for Gramley, who announced that he was leaving several months ago. Some top officials, such as chief economist Beryl W. Sprinkel, favor appointing a monetarist economist as a signal that the White House still supports a hard-line stance against inflation. But at least one of Sprinkel’s choices, W. Lee Hoskins, chief economist at Pittsburgh National Bank, has already privately rejected overtures from the White House.

The most likely outcome, officials say, is that Reagan will settle on a compromise candidate who is not clearly identified with either economic camp. The search has focused recently on finding a relatively unknown banker, probably from the South, who can bring firsthand experience to the Fed, rather than choosing a big-name economist with an academic background.

Generally Satisfied

The Administration maneuvering, ironically, comes at a time when White House officials are generally satisfied with the Fed’s recent performance. With the economy still showing no clear signs of emerging from the doldrums, Volcker has been willing to tolerate double-digit growth rates for M1 that have left the basic measure of money held in cash and checking accounts far above the Fed’s original target range and have encouraged short-term interest rates to fall more than three percentage points from a year ago.

“It’s a misconception that Volcker, (Henry C.) Wallich and Gramley are only tight-money enthusiasts,” said Michael Bazdarich, chief money-market economist at Claremont Economics Institute in Claremont, Calif. “They’ve been following a very expansive policy for quite a while.”

Other analysts share the view that the Fed will avoid even a light tap on the monetary brakes until it is absolutely clear that the economy has strongly picked up speed again.

“The Fed is naturally inclined to an easy monetary stance today, and any new members the White House names would just continue to push it in that direction,” said John M. Albertine, head of the American Business Conference and an economist with close ties to the Reagan Administration. “Two serious external threats--the weak European recovery that is just barely beginning and the continuing Third World debt--give the Fed no choice but to be accommodative.”

Fed officials say the central bank is not to blame for slow growth. They point to the robust 3.7% growth rate in personal consumption last summer and say that the weak GNP gain of just 2% over that same period is due to a rising tide of foreign products replacing demand for U.S. manufactured goods.

And even Fed Vice Chairman Martin, who has generally favored higher money supply targets, does not blame the Fed for the economic slowdown.

Not Doing Enough

“I’ve dissented a few times, but I’m not saying the slowdown was due to an inappropriate Fed policy,” he said in an interview earlier this year. “What I am concerned about is that we are not doing enough now to overcome an inadequate rate of growth.”

Some Fed analysts are convinced that Volcker, in fact, shares those concerns but is careful to mask his intentions to avoid reviving inflationary fears.

“Talk of more restrictive policy may prove to be a convenient straw man that could easily be thrown out the window,” says A. Gary Shilling, who heads a New York consulting firm. “The Fed seems to be more concerned about a U.S. recession--which could precipitate a worldwide slowdown, financial crisis and deflation--than about a possible resurgence of inflation.”