President Reagan's four appointees as governors of the Federal Reserve Board prodded Fed Chairman Paul A. Volcker toward a less restrictive monetary policy when they outvoted him last month on a cut in a key interest rate charged to financial institutions, sources said Tuesday.
Despite the setback, Volcker was able to delay implementation of the drop in the discount rate until West Germany was prepared to reduce its own lending rates, allowing the Fed on March 7 to announce a unanimous decision to approve a discount rate cut to 7% from 7.5% in coordination with other major industrial nations.
And, even though Volcker apparently was outvoted for the first time since becoming Fed chairman in 1979, most analysts remain convinced that he intends to serve out the rest of his term, which runs through August, 1987.
Fed spokesman Joseph Coyne, while refusing to comment on the discount rate decision, insisted that the chairman "is not about to resign." Volcker was unavailable for comment.
Fed officials would not discuss the initial meeting at which Volcker was opposed to a discount rate cut. It was first disclosed by syndicated columnists Rowland Evans and Robert Novak.
But other sources confirmed that four governors--Fed Vice Chairman Preston Martin, Martha Seger, Wayne Angell and Manuel Johnson--voted in late February for the half-point drop in the discount rate, while Volcker and governors Henry Wallich and Emmett Rice objected to the move at that time.
The unprecedented revolt against Volcker, according to sources who spoke only on condition that they not be identified, was led by Johnson and Angell, who joined the Fed's board just last month. Johnson was a top Treasury official in the Reagan Administration, and Angell was a Kansas banker pushed by Senate Majority Leader Bob Dole (R-Kan.).
Rather than press an immediate announcement of the decision, however, the four Reagan appointees agreed to delay the move until Volcker could arrange a joint rate cut with West Germany and Japan.
Volcker argued that the Fed should not cut its discount rate until foreign central banks moved. A unilateral cut by the Fed, he feared, might trigger a run on the U.S. dollar, which already had fallen about 25% against several major currencies since Sept. 22, when five leading industrial nations, including the United States, announced a coordinated effort to bring down the dollar's value.
"Volcker wasn't opposed to cutting the rate, but he was opposed to going first," said one source familiar with the thinking of the Reagan appointees. "The end result may be best for everyone--Volcker got a coordinated rate cut, and the 'Gang of Four' showed they are not going to be intimidated or cowed by the (Fed) bureaucracy."
Several Fed watchers had speculated in the past that Volcker might lose his grip on monetary policy once Reagan had appointed a majority of the seven board members, which is why his four appointees are sometimes referred to as the "Gang of Four."
But even as many analysts said that the discount rate decision suggests that the Fed may be slower in the future to boost interest rates, they also pointed out that Volcker still retains a working majority on the larger Federal Open Market Committee, which makes most important monetary policy decisions.
The committee includes, in addition to the seven Fed governors, the 12 Fed regional bank presidents, with five of the regional presidents voting at the monthly meetings on a rotating basis.
"Volcker may have been in the minority on this initial decision," said Irwin Kellner, chief economist at Manufacturers Hanover Trust in New York, "but I don't think it means he will be in the minority all the time."
One regional bank president declined to discuss the discount rate decision, but he suggested that the Fed stance remains basically unchanged. "I wouldn't read too much into the discount rate all by itself," said Gary Stern, president of the Minneapolis Fed. "The basic thrust of policy has not changed."
And Lyle Gramley, a former Fed governor who is now chief economist at the Mortgage Bankers Assn., insisted that any revolt against Volcker has been overblown. "I seriously doubt that Paul Volcker has been forced to do anything he doesn't want," said Gramley, who resigned from the Fed late last year. "He is one very tough guy."