A Looser Fed

By Barbara Rudolph

When Reagan appointees gained a majority on the seven-member Federal Reserve board of governors last February, predictions abounded that the central bank would adopt a more stimulative monetary policy in an effort to pump up the economy. After all, the Reaganite faction would be led by Manuel Johnson, the current Fed vice chairman, who is a former Assistant Secretary of the Treasury, certified supply sider and onetime critic of the Reserve Board for being too tightfisted in its fight against inflation. So far, the new lineup seems to have done its job. Since last March the Fed has steadily reduced the discount rate that it charges on loans to member banks from 7 1/2% to 5 1/2%. Says Richard Rahn, chief economist for the U.S. Chamber of Commerce: "I don't think we would have had all those drops in interest rates without the new crowd."

But speculation that the Reaganites might wrest power from Chairman Paul Volcker, and perhaps even goad him into resigning, has proved to be off the * mark. Despite a brief, publicized dispute over a discount-rate cut in February, the Reagan appointees -- Johnson, Martha Seger, Wayne Angell and H. Robert Heller -- have generally worked well with Volcker and his allies Henry Wallich and Emmett Rice. Only Seger, a former Michigan bank regulator, has publicly sniped at Volcker. One of her complaints: the central bank's staff, which answers to the chairman, does not keep the other Fed governors fully informed of its actions.

For the most part, the Volcker faction has gone along with the Reaganites' contention that the economy needs some juice. "There is a broad consensus on monetary policy on the board right now," says Johnson. For the past three months the governors have let the basic money supply grow at a 16% annual rate -- much faster than the 3%-to-8% target range that the Fed originally set for this year. That accommodating policy has allowed the growth rate in the gross national product to bounce up from .6% in the second quarter to 2.4% in the July-September period.

Last week, as the Fed's open-market committee gathered for one of its regular closed meetings to set monetary policy, the governors faced a difficult choice. The board could try to push interest rates down further or stand pat on the theory that the economy is already recovering. The danger is that an overly stimulative policy could cause a new outbreak of virulent inflation. Even Johnson appears to be growing cautious. "Our first responsibility," he says, "is to stabilize prices." Though the minutes of the board's meeting will not be disclosed for several weeks, Fed watchers doubt that the governors changed their current policy.

Ironically, many supply siders, who favor tax cuts and easy monetary policy, believe that their old ally Johnson has been too timid in urging that the Fed spur the economy. Says Supply Sider John Albertine, vice chairman of Chicago- based Farley Industries: "The Fed has missed the boat. Real interest rates are still much too high." Agrees Paul Craig Roberts, a scholar at Georgetown University's Center for Strategic and International Studies: "The Reagan appointees are powerless in view of the Volcker aura."

But the White House will soon have a chance to add a new member to the ranks of the Reaganites. Rice plans to resign at the end of the year, leaving only Volcker and Wallich as holdovers from the pre-Reagan era. The chairman's term ends next August, and the betting is that he will not seek reappointment to head what is increasingly becoming the Reagan Federal Reserve.

With reporting by Jay Branegan/Washington