Fed Member Quits, Leaving Clinton 2 Positions to Fill : Policy: President has rare opportunity to steer board in a new direction following 12 years of Republican domination.

David W. Mullins Jr., vice chairman of the Federal Reserve Board, announced Tuesday that he will resign, handing President Clinton an unusual opportunity to put his stamp on a Republican-dominated institution that influences the course of the economy with its control over money supply and interest rates.

The unexpected departure of Mullins, who said he will step down Feb. 14, along with the previously announced resignation of board member Wayne D. Angell, will allow Clinton to nominate two new members to the Fed’s seven-member board. Mullins and Angell were appointed by Clinton’s Republican predecessors, Ronald Reagan and George Bush.

“The President will nominate individuals who will add some constructive diversity to the board,” Treasury Secretary Lloyd Bentsen said, signaling the Administration’s intent to set a new course after 12 years of Republican appointments.

The change comes at a key time in the economic cycle. Recent statistics indicate that a sluggish recovery is beginning to pick up speed, causing some economists and Fed insiders to worry that inflationary pressures could be building.

The central bank’s traditional inflation antidote is higher interest rates, and Fed Chairman Alan Greenspan has served notice that the board will probably act soon to nudge short-term rates higher.

The Fed has lowered rates by four percentage points to combat the recession that began in 1990, and it has left its benchmark discount rate at 3% since mid-1992. The discount rate is the interest rate paid by commercial banks on overnight loans from the Fed.

Mullins, 47, has been “one of the more vociferous advocates of higher interest rates,” said David Hale, chief economist of Kemper Financial Companies, a Chicago-based investment company. He would have been a “voice for tightening” to keep inflation in line in the months ahead, Hale said.

Mullins said he will become a partner in Long-Term Capital Management, a recently formed investment management firm based in Greenwich, Conn.

Angell, a former Kansas banker, farmer and university professor, has not announced his plans.

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The opportunity to appoint two new board members is something of a political windfall for the President. It could bolster the White House economic agenda, which depends in large part on a continuation of low interest rates to stimulate consumer and business spending.

“It’s important, no two ways about it,” a delighted senior Administration official said.

But the Administration--and the Fed--must achieve a delicate balance. If bond traders conclude that the central bank is keeping short-term rates too low for too long, they are likely to bid up long-term rates to hedge against future inflation. Higher long-term rates could do more damage to the Administration’s economic program than a modest increase in short-term rates.

It is widely believed that Clinton will name George Perry, an economist at the Brookings Institution in Washington, to the position vacated by Angell. With Mullins’ retirement, the President could nominate Perry to the vice chairman’s post, though questions have been raised about placing Perry on the board in any capacity because his wife is a portfolio manager for several mutual funds.

There is little overt disagreement at the moment between the Fed and the Administration, even on the sensitive question of interest rates. Nevertheless, the White House has kept an anxious eye on Greenspan, cautioning against raising rates too aggressively in the near term.

“There is a fear of any type of action when things are going so good,” a senior Treasury official said.

“It’s hard to make the call as to when to make the adjustment,” said Laura D’Andrea Tyson, chairman of the President’s Council of Economic Advisers.

Viewed from the White House perspective, a false step in either direction could upset the economy two years down the road, when Clinton is likely to begin his reelection drive. Keeping rates too low could fuel inflation, but raising them too rapidly could cause another economic slump.

“So goes the economy, so goes President Clinton’s personal popularity ratings,” a senior White House official said. “They are directly tied to each other.”

“These opportunities don’t come along all the time,” the aide said. “We don’t know how long or hard the recovery will be. If we follow the normal cycles, we could end up dipping back at the end of 1995.”