New Act, Old Woes at the Fed

Some tricky decisions face the incoming chairman

As last week's drama of the dollar made clear, G. William Miller will be entering a political and economic minefield when he succeeds Arthur Burns as chairman of the Federal Reserve Board early next month. It will be largely up to Miller to make the tricky day-to-day decisions on when and how strongly to intervene in currency markets to keep the dollar from plunging too much lower. In that field, at least, the basic policy of intervening to stabilize the falling dollar has been set: but on domestic issues, the incoming chairman has no such clear guidelines. He will be under heavy pressure to pump out enough money to speed up the growth of the economy, yet somehow keep the money supply from growing so rapidly as to accelerate inflation, and to hold down interest rates besides. How can a Fed chairman perform such an exquisitely difficult balancing act? Says one staff member of the Senate Banking Committee: "The answer is obvious--you don't."

Miller's first challenge will be to establish himself as a competent, forceful leader. The importance of his doing so was underscored last week by a sharp drop in the stock market. The Dow Jones industrial average tumbled almost 38 points to close the week under the 800 mark at 793.49. The drop occurred mostly because of worries about the dollar, but also partly because of uncertainty about Miller and what policies he will follow. In addition, businessmen will be watching Miller's performance in checking inflation for clues as to whether to launch plant expansion and modernization programs that are needed to keep the recovery rolling. As Miller takes over, it will be entering its 34th month, just about the average length for post-World War II periods of expansion.

Though Miller won enormous respect as the chairman of Textron Inc., the giant and flourishing conglomerate, he has had little firsthand experience in the esoteric area of monetary policy. During his first few months in office he is likely to be more dependent on staff than was Burns, who dominated Fed decisions by the force of his personality and wide-ranging knowledge. As a consequence, no radical changes in Federal Reserve Board policy are expected immediately--but that will scarcely keep Miller out of controversy.

The board of late has been trying gradually to reduce the rate of growth in money supply in order to "undernourish" inflation, as Burns once put it. It has not had much success; the basic money supply during 1977 grew by about 7.4%, beyond Burns' target range of 4% to 6 1/2%. That bothers conservatives, who want slower growth. But the board's efforts to throttle back have pushed up interest rates sharply. For example, the rate on "Fed funds"--overnight loans from one bank to another--rose two full percentage points during 1977, to 6.65%. Liberals like Presidential Economic Adviser Charles Schultze fear that any further rise will hurt the recovery by making business borrowing too expensive.

Thus Miller will shortly be overwhelmed by diametrically opposed advice. Conservatives like Beryl Sprinkel, executive vice president of Chicago's Harris Trust & Savings Bank, contend that the Federal Reserve should concentrate on moderating the growth of money supply and let interest rates go wherever the market takes them. Liberal economists like Arthur Okun of the Brookings Institution retort that the Fed should concentrate on holding down business borrowing costs and not worry so much about money-supply targets.

Whatever policy Miller adopts, he will need luck as well as skill to see that it actually gets carried out. During 1977 money supply bounced around wildly, rising at an annual rate of over 19% in April, but falling at a 1.8% rate in November. The swings puzzled and frightened investors and were a contributing factor in the stock market's decline. One reason for the gyrations is that velocity--the speed with which money changes hands--speeded up and slowed down unpredictably. A change in velocity can cause the Federal Reserve's maneuvers in buying and selling Government securities to expand money supply either much more or much less than the board intends; last year both things happened.

Miller can perhaps take some ironic comfort in the thought that on this subject, his lack of training in monetary matters puts him at no disadvantage: even his more experienced colleagues-to-be on the board do not really understand what has been happening to velocity. Says one staffer: "The whole thing is a mystery." But the technical complexities of carrying out money policy are only one problem: whatever Miller decides to do, he is bound to ruffle either liberals or conservatives. It would take only minimal bad luck or misjudgment for him to dismay both.

This file is automatically generated by a robot program, so viewer discretion is required.