Down to the Finish Line

By John S. DeMott

It looks as if Volcker will remain Federal Reserve Chairman

The quiet jockeying for position in the race for new chairman of the Federal Reserve is getting a little more noisy and a little less crowded. The White House has finally begun to consider seriously the question of a successor to Chairman Paul A. Volcker, 55, whose four-year term expires in August. And while no final decision was made last week, Volcker became the odds-on favorite to succeed himself. The only other serious contender is Alan Greenspan, 57, a frequent adviser to the Reagan White House and once Gerald Ford's chief economist. Others who were candidates, or fancied themselves candidates, are no longer being considered. Among them: Citicorp Chairman Walter Wriston, Federal Reserve Vice Chairman Preston Martin and Treasury Under Secretary Beryl Sprinkel.

Questions about who would get the Federal Reserve post and worries about a new jump in interest rates have been enough to drive some businessmen crazy. Said Exxon Chairman Clifton Garvin Jr. last week: "The important thing is that we get this thing over with."

The issue was also starting to weigh heavily on Volcker, who felt the waiting had gone on too long. Early last week he went so far as to request a private meeting with Reagan. In a session just after a White House show by Entertainer Mary, Martin, Volcker told the President that he wanted to stay on and that uncertainty about the top job at the Fed was becoming unhealthy for financial markets. The next day, in part because of rumors that Volcker was on his way out, investors drove the Dow Jones industrial average down 19 points. The following day it slumped an additional 9 points. The market recovered part of the loss later in the week after-rumors started that Volcker might be reappointed after all. It closed the week down 17 at 1196.11.

Wall Street has reason to be nervous. The question of who will manage the Federal Reserve is just another unwelcome unknown at a time when other unknowns are sprouting everywhere in the economy. One of the biggest causes of concern at present is the rapid growth of the money supply. Since March, the basic pool known as M1 has increased at an annual rate of 13.5%, to $508.5 billion, fueling fears that the Federal Reserve will soon have to clamp down, sending interest rates back up. Federal Reserve officials have been arguing that the increase in the M1 figure was an aberration and that the broader-based statistics for money growth, M2 and M3, showed that the Federal Reserve still has the money supply under control. Figures released last week showed that M1 is growing faster than the goal set by the Federal Reserve but that M2 is still within target.

If the Federal Reserve decides that the money supply is growing too fast and slams on the brakes, it could halt the young recovery, which has been under way only since the beginning of the year. In some ways, that economic upturn is stronger than anticipated. Retail sales in May rose 2.1%, their strongest rise in months. But the recovery's true breadth and depth are as yet unshaped. Unemployment is down, but only slightly, to 10.1% of the U.S. labor force, and the 10.1% of the U.S. labor force, and the layoffs go on.

Interest levels are far below the Mafia-like loan-shark rates of 20% or so that prevailed 24 months ago, but they are still very high by historical standards. Inflation, now at an annual rate of less than 4%, could be rekindled if the economy heats up too quickly. Already there are a few scant signs of that. In May, the producer price index, a harbinger of consumer prices, rose .3%, after declining slightly in April and March. Small though it was, it was the highest rise for the index so far this year.

The delicacy of the recovery and worries about the problems in international finance caused by huge debts in developing countries have been adding strength to the notion of keeping Paul Volcker on the job. In the financial community Volcker is regarded as something of a demigod because he brought down inflation, strengthened the dollar and set the stage for the euphoric bull market in stocks that began last August. Nearly 80% of 702 executives polled by the investment firm A.G. Becker Paribas gave their vote of confidence to Volcker, with Alan Greenspan a distant second at 5.8%. Monetarist Milton Friedman got only 5.5%, Treasury Under Secretary Sprinkel 2.5%, and Fed Vice Chairman Martin less than 1%. More than half the executives fear a return to double-digit inflation if Volcker is replaced. So bullish is Wall Street on Volcker that Charles M. Lewis, vice president of Shearson/American Express, predicts that "the day the reappointment is announced will see the Dow rise 35 points. Nobody ever made more money in the market than they made under Volcker."

Only a few weeks ago, Volcker was given little chance of reappointment. A nominal Democrat and a Carter Administration appointee, he had never enjoyed close relations with the President or other White House officials. Treasury Secretary Donald Regan has been the strongest critic of Volcker within the Administration, arguing that the Fed chairman was not arguing that the Fed chairman was not "irreplaceable." Regan did not think much more of Greenspan. At one point, in desperation, he said, "If they appoint Greenspan, they'll have to find themselves another Treasury Secretary." The Treasury Secretary put forward the name of Paul McCracken, 67, chairman of the Council of Economic Advisers in the first Nixon Administration, as his candidate for the Fed job, and watched the idea sink before it got anywhere.

But as the White House staff began to weigh the advantages of having its own man at the Federal Reserve against the domestic and international uncertainty that could be caused by switching, the pendulum swung toward Volcker. Secretary Regan did an about-face and last week praised the Federal Reserve chairman publicly, saying, "I think he's done a very good job over a period of years. There were some hits and misses, but overall I think he's done well." Even Preston Martin conceded at week's end that Volcker's reappointment was "highly likely."

Greenspan has strong credentials for the Federal Reserve post. Well regarded in Washington for more than a decade, he measures up to Volcker in many ways and has the edge over the incumbent in one respect. He is not a holdover from the Carter Administration.

Moreover, Greenspan, like Volcker, is expected to be independent of the White House, which might want the chairman to do its bidding until the presidential election is over. Both would resist pressures to politicize the Federal Reserve.

Greenspan would have to move quickly to establish his independence, and Volcker would continue his practice of staying at arm's length from Presidents.

In neither case was the Reagan Administration likely to get "its man" at the Federal Reserve.

Within the Reagan Administration there was little open opposition to Greenspan, but there did not seem to be much reason to change from Volcker. At week's end support was shifting heavily to Volcker. Budget Director David Stock man joined Martin Feldstein, chairman of the Council of Economic Advisers, in backing Volcker. Vice President George Bush and Presidential Advisers Michael Deaver and Jim Baker threw their weight behind Volcker, while Presidential Counsellor Edwin Meese remained opposed to him. At the moment, the decision is in the President's hands.

There were reports of a neat compro mise: Volcker would be reappointed to a four-year term with the understanding that he would step down in January 1985. That would allow whoever is President to name his own man to the Federal Reserve at the beginning of his term. In the past, Volcker himself has said that he believes the two most important jobs in Washington should have concurrent terms.

-- By John S. DeMott. Reported by Laurence I. Barrett and David Beckwith/Washington

With reporting by Laurence I. Barrett, David Beckwith This file is automatically generated by a robot program, so viewer discretion is required.