Volcker Resigns; Greenspan Picked as New Fed Chief

Paul A. Volcker, the nation’s leading inflation fighter during his eight years as chairman of the powerful Federal Reserve Board, said Tuesday that he will step down, and President Reagan announced that he will nominate conservative economist Alan Greenspan to replace him.

Volcker, whose tight money policies spawned record interest rates and two deep recessions in the early 1980s, said he was leaving voluntarily.

“There’s a time to come and a time to leave,” Volcker declared at a hastily convened White House news conference. “I had no feeling I was being pushed.”

News of the departure of Volcker, often called the second most powerful man in America because of his influence on the nation’s economic health, sent a shock wave through the international financial community.

Reagan, in making the surprise announcement after White House officials had dropped hints that they hoped Volcker, 59, would stay, said he accepted the Fed chairman’s decision “with great reluctance and regret.”

And Treasury Secretary James A. Baker III, who has met with Volcker frequently in recent years, disclosed that he had tried to persuade him to accept a third four-year term at the helm of the nation’s financial system.

But some analysts speculated that recent statements by Administration officials were ambiguous and fell short of offering Volcker the personal assurances of support that could have persuaded him to change his mind.

Greenspan, a Wall Street economist who served as chief economic adviser to Presidents Richard M. Nixon and Gerald R. Ford, frequently had said that he supported Volcker’s reappointment, but he had been quietly lobbying for months to be selected for the position if Volcker departed. He was approached earlier by Administration officials about taking the job. And, when Reagan offered it to him on Monday afternoon, Greenspan said, it took him only “milliseconds” to agree.

Others Considered

Although several others were considered as possible replacements, including Fed Vice Chairman Manuel H. Johnson and current White House chief economic adviser Beryl W. Sprinkel, Greenspan was the only serious candidate to succeed Volcker, sources said.

“Filling Paul Volcker’s shoes will be a major challenge,” Greenspan said, adding that Volcker has “served as the model of the ideal chairman of the Federal Reserve. If the Senate confirms me, I intend to follow that model.”

The Fed, a quasi-independent government agency responsible for managing the nation’s money supply and with wide influence over interest rates, has taken on an increasingly important role in recent years in defending the dollar’s value in currency markets and coping with the crisis among debt-plagued Latin American nations.

Speculation was rife over the possible effects of Volcker’s replacement by Greenspan. Most economists argued that he is likely to adopt a tough anti-inflation stance, perhaps demonstrating his willingness to raise interest rates even at the expense of slower economic growth. But some Democrats worried that the conservative economist would be more willing to tolerate higher prices to maintain economic growth through the election next year.

Volcker, who was appointed by then-President Jimmy Carter in 1979 in the midst of an inflationary spiral and reappointed by Reagan in 1983 largely to reassure financial markets that a vigilant anti-inflationary policy would remain in place, was the target of intense political attacks during the recession of the early 1980s.

Record Interest Rates

Under Volcker, the Fed squeezed hard enough on the growth of the money supply to push interest rates to record levels in 1981, driving down inflation much faster than expected but at the price of the nation’s worst economic downturn and highest unemployment since the Great Depression.

But Volcker weathered the storm of criticism. And he emerged as one of the most respected government officials of recent years because of his willingness to fight inflation, despite the pressures to relent, and because of his ability to stabilize the economy at a time of record federal budget deficits, financial turmoil that threatened the banking system and unprecedented changes in global capital flows.

“We should keep in mind that it was Paul Volcker’s policies, unpopular policies, that broke the back of inflation,” said Senate Banking Committee Chairman William Proxmire (D-Wis.), himself a volatile Volcker critic over the years. “We’re going to miss him, miss him very much.”

The announcement of Volcker’s impending departure, which will take place after Greenspan is confirmed by the Senate, caught Wall Street by surprise and jolted financial markets Tuesday.

Bond Market Tumbles

The U.S. dollar fell sharply against other major currencies, and the bond market, which is a key barometer of inflationary fears, tumbled in active trading. The stock market, in a see-saw session, plunged immediately after the announcement, then rallied later in the day before closing down modestly.

Once he takes over at the Fed, analysts said, Greenspan is likely to face strong pressures in financial markets to establish his own anti-inflation credentials.

“He is going to have to out-Volcker Volcker for a while,” said Larry Kudlow, chief economist at Bear Stearns & Co., a New York investment firm. “He will be tested by the markets to prove his independence from the White House, and I think he will be up to the challenge.”

And Henry Kaufman, a Wall Street guru as chief economist at the Salomon Bros. investment firm, warned that Greenspan does not carry the weight among foreign investors and other central bankers that Volcker had developed in the years he has been involved in international finance.

Had Headed N.Y. Fed

“Mr. Greenspan will have to demonstrate both his competence and policy independence before he can gain full confidence of the financial markets,” Kaufman said. Volcker was president of the New York Federal Reserve Bank when he was appointed in 1979.

C. Fred Bergsten, president of the Institute for International Economics here, contended that, although Greenspan was the best replacement, keeping Volcker would have done more to assure global economic stability.

The White House “never was willing to give Volcker the kind of open-arms support of his policies that he should have received,” he said.

On Capitol Hill, lawmakers divided along party lines over Greenspan, who has long-standing ties to the Republicans, with Democrats expressing skepticism that he would remain as aloof from White House influence as had Volcker, a nominal Democrat who was unknown to Carter before he appointed him to head the Fed.

“Volcker didn’t pay attention to Jimmy Carter or Ronald Reagan. He did what was economically correct,” said Rep. Tony Coelho (D-Merced), who is third in the House leadership. By contrast, Coelho argued, “Greenspan is such an ideologue that he will more than likely cave in to ideological pressures.”

Republicans Back Nominee

Most Republicans quickly lined up behind Greenspan. Senate GOP leader Bob Dole of Kansas predicted that he would easily receive Senate confirmation.

House Speaker Jim Wright (D-Tex.), a longtime advocate of lower interest rates, expressed disappointment with both Volcker and Greenspan and said he feared the appointment would lead to higher interest rates and slower economic growth.

Volcker, who analysts said had wanted to be followed by his protege, New York Fed President Gerald Corrigan, quickly endorsed Greenspan’s selection. “ . . . I feel very happy that Alan is going to take over (the) institution and, I’m sure, maintain it,” Volcker said.

The Administration’s handling of the Fed decision, one of the most closely scrutinized appointments of Reagan’s second term, was carefully shielded behind a cloud of secrecy. Although Treasury Secretary Baker acknowledged that he had known of Volcker’s reluctance to seek a third term and had been secretly preparing for a successor, White House officials had hinted to reporters in recent days that Volcker was likely to continue as Fed chairman.

Venice Summit Meeting

Officials admitted that it was crucial for Reagan to deal with the issue before leaving today for the Venice economic summit meeting, which begins next week. Volcker met privately with Reagan Monday afternoon and took with him a letter of resignation.

Volcker, whose background and experience could command a multimillion-dollar salary on Wall Street, said he has made no plans for his future.

When asked where he would go after leaving the Fed, Volcker replied: “I have not the vaguest idea at this point.”

Staff writer David Lauter contributed to this story.