Chairman Volcker Keeps His Job

By Maureen Dowd

"I couldn 't be more pleased, "says Reagan of the Fed boss

His voice twinkling, Ronald Reagan interrupted his regular Saturday radio address with what he called a "news flash." Said the President: "Some years ago, a favorite movie theme was the crusading reporter--hat on the back of his head, clutching the phone--[who] would yell, 'Give me the city desk, I've got a story that'll crack this town wide open!' I've read that line a few times myself. Well, I'm not wearing a hat or clutching a phone. But I'd Like to make an important announcement. I have, today, asked [Federal Reserve Board] Chairman Paul Volcker to accept reappointment for another term. He's agreed to do so. And I couldn't be more pleased."

With this showman's touch, Reagan told Wall Street what it longed to hear, ending months of debate and speculation about what some consider the second most powerful job in Government. Said Treasury Secretary Donald Regan, until recently a Volcker critic: "He's the right man at the right time. In times like this you don't rock the boat."

Tradition dictates that a Government announcement of deep concern to Wall Street be delayed until the markets have closed, so that stock and bond traders will not stampede. But Reagan's timing may also have been determined by his desire to keep the news from leaking. After making his decision Friday afternoon, he told only a few top advisers. He telephoned Volcker from Camp David Saturday morning, an hour before the radio show, reaching him at his Manhattan apartment, where he spends weekends.

While Volcker was surprised at the timing, he was expecting the nod, and so was Wall Street. The stock market, which not long ago dropped sharply when it seemed that Volcker might be replaced, resumed its happy rise last week. Spurred in part by the growing conviction that the Fed Chairman's job was safe, the Dow Jones industrial average rose 46 points, its second largest weekly gain this year, and reached a record high of 1242.19. Said New York Investment Banker Felix Rohatyn: "Volcker's monetary policy has been criticized by almost everybody and is therefore probably right." Reaction on Capitol Hill and in international banking circles was also very favorable. Only a few demurred. Complained Conservative Monetarist Milton Friedman: "President Reagan has decided to take the course of least political resistance."

Only a couple of months ago, he had a lot of company in his opposition to the Princeton-educated, cigar-chomping, 6-ft. 7 1/2-in. Volcker. In his fierce determination to conquer inflation, Volcker restricted the growth of the U.S. money supply so sharply that interest rates rose above 20%. The policy worked, but many thought it contributed mightily to the most punishing recession since World War II. The depth and duration of the slump put a severe strain on Volcker's relations with the Reagan Administration, cool to begin with. The Chairman, a nominal Democrat and a 1979 Jimmy Carter appointee, made no secret of his dismay at Reagan's $200 billion deficits. Administration officials, led by Treasury Chief Regan, reciprocated by accusing Volcker of presiding over erratic swings in the money supply that alternately threatened to worsen the recession or rekindle inflation.

In the financial community, however, Volcker became a hero. Bankers and brokers applauded him for sticking with his tight-money policy until the recession had tamed inflation, slashing the annual rate of price increases from 13% at the beginning of his term to less than 4% now. Then, in the nick of time last summer, Volcker loosened up enough to set the stage for a recovery that now looks more vigorous every week.

Volcker's first term was due to expire Aug. 5, and once Administration officials began to think in earnest about a replacement, they concluded that anyone else would take too long to match Volcker's towering prestige. The only other name seriously considered was that of Economist Alan Greenspan, who professed himself an admirer of Volcker and vowed to continue the Fed Chairman's policies. One after another, Volcker's former critics began urging his reappointment. The last holdout, Presidential Counsellor Edwin Meese, finally came around last week. By then, the only question left was why Reagan was taking so long to announce what had become a foregone conclusion.

One factor was a lingering resentment over Volcker's disagreements with supply-side economics. Only last week a couple of the President's California "kitchen cabinet" friends warned Reagan that he could not trust Volcker in an election year. Says one Administration official: "The White House was petrified by fear that Volcker would do the same thing to Reagan in 1984 that he did to Carter in 1980: push interest rates up at a critical time. Now it is convinced that it won't happen." In addition, Reagan was reluctant to look as if he had been rushed into making a decision by his aides. Says one: "The President kept his own counsel these last ten days. He had to work it out to his own satisfaction."

Volcker aided his own cause by waging a quiet but deft back stage campaign for reappointment to a position that pays $69,800 a year. For one thing, he told presidential aides that he believed the Federal Reserve Chairman's term, normally four years, should end at the same time as the President's. He said that the newly elected President should not concern himself with the Fed in the busy early days of his term but should address it roughly six months afterward. Reagan was pleased with what he considered this "gentleman's agreement" that Volcker will resign in mid-1985 and let him pick his own money maven-- though no formal deal as such was struck, and none could be enforced even if it had.

More important, perhaps, Volcker made it clear in private talks with Administration officials during the past six weeks that over the next 18 months he sees no reason to crack down hard on the money supply again. In his opinion, inflationary pressures have subsided enough to let the Fed safely make enough money available to meet the borrowing needs of both business and Government, even given those gargantuan deficits, and keep the recovery rolling. No one would accuse Volker, who is justly famed for his stubbornness, of modifying his fierce anti-inflationary convictions to keep his job. But he was nonetheless telling Reagan's lieutenants what they wanted to hear.

Volcker further soothed the White House at a May 24 meeting of the Federal Open Market Committee, the arm of the Fed that acts most directly to expand or contract the money supply by buying or selling Government securities. There Volcker faced a rebellion led by Federal Reserve Governor Henry Wallich. Committee members pointed out that M1, the narrowest measure of the money supply, has been growing at about twice its target rate and argued for a tightening up, even at the cost of a rise in interest rates. Replying that other, broader measures of money supply are showing no excessive increase, Volcker persuaded a committee majority to continue putting out enough money to keep key interest rates about where they are now. Last Friday, however, his critics recieved additional ammunition when the Fed announced that the M1 had jumped $5.6 billion. Though praising Volcker as an "honest, stubborn guy," Economist Michael Evans, cautioned: "With the M1 way out of line, a lot of people are beginning to question Volcker's commitment to the [anti-inflationary] cause."

Volcker's policy presents some dangers. If deficits are not reduced, it is still possible that Government borrowing needs will eventually collide with those of business, forcing the Federal Reserve to make a choice between letting interest rates rise enough to cut short the recovery, or pumping out enough money to start a new round of inflation.

For the moment, however, price boosts are small, interst rates seem reasonably stable, and the recovery is gaining strength. Housing starts in May rose 19% to an annual rate of 1.8 million, and U.S. factories operating at 72% of capacity, up from a low of 67.4% last November.

Volcker said his new term would offer "a rare opportunity to achieve sustained growth on a foundation of stability." Meanwhile, he has demonstrated that a forceful money manager can entrench himself so deeply in his job that it becomes difficult even for a President who is uncomfortable with him to substitute his own man. Nonetheless, the President has struck a blow for continuity, in the process demonstrating anew that he is a master of both the bipartisan move and show-biz delivery.

--:By Maureen Dowd. 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.