Paul A. Volcker is one of the most powerful men in the United States. Chairman of the Federal Reserve Board since 1979, he is the person most responsible for formulating and carrying out the nation's monetary policy.
The Fed's money policy has an enormous impact on the economy--on the level of interest rates, the rate of inflation and the growth rate of jobs and income. Since Volcker was appointed by former president Carter to calm widespread fears about gathering inflation and a weakening U.S. dollar, he has steered money policy on a strict anti-inflation course.
Volcker, 54, is a distinctive Washington figure, and not merely because of his 6-feet 7-inch height. During the past decade, he has played a central role in shaping domestic and international monetary policy, successively as a top Treasury Department official, president of the New York Federal Reserve Bank and chairman of Fed.
Nevertheless, he is also one who values his privacy, maintaining his home in New York City and commuting to an apartment here close to the Fed's headquarters at Constitution Avenue and 20th Street NW. The staff regards him as a gifted professional. Associates describe him as non-political.
Volcker's greatest impact has come from the fundamental change in Fed anti-inflation policy, which he engineered in October 1979. Rather than attempting to regulate the growth of the money supply through a close targeting of interest rates, the Fed began to regulate the increase in reserves supplied to the banking system day by day, allowing interest rates to vary with market conditions.
That policy has persisted despite record high interest rates, two recessions and occasional criticism from Presidents Carter and Reagan. But because the Fed has not been directly involved in setting interest rates since 1979, it has escaped serious political attack for the consequences of the surge in interest rates. That, in turn, has given Volcker and other Fed members more time to follow what they believe is the Fed's essential role in fighting inflation.
Volcker has repeatedly testified on the Hill on the importance of holding to this fight, even if it involves temporary economic pain.
Many who know him believe that Volcker would resist changing course even under strong pressure to do so from an administration or Congress worried about the electoral costs of high interest rates. But, as Volcker acknowledged recently, there have been few occasions where the Federal Reserve has persisted in a monetary stance that is opposed by the White House and Congress.
He is serving a four-year term as chairman and a 12 1/2-year term on the Fed's board of governors, both fixed by Congress to ensure the independence of the board. But "for all the statutory insulation of the Fed, I don't think that insulation would be sufficient" if there were not administration support for the Fed's current policy, Volcker told a Capitol Hill audience last month.
While nominally independent from the executive branch, the Fed is susceptible to pressure from the president. Volcker meets regularly with administration officials and has Reagan's explicit backing for his policy of slow money growth. He also appears frequently before Congress. Twice a year, the Federal Reserve Board must present a monetary report to congressmen laying out its targets for money growth, forecasts for the economy and monetary policy objectives.
Although the new Fed policy was advocated and supported by monetarist economists--who believe that the rate of growth of the money supply determines the rate of inflation and has no long-term effect on economic growth--Volcker is not a strict monetarist, officials say. He believes that both monetary and fiscal policy are important influences on the economy and on inflation, they say.
While Volcker commands the center of attention on monetary policy, he is one of seven members of the Federal Reserve Board. The board meets eight times a year with other members of the Federal Reserve System in the policy-making body called the Federal Open Market Committee, chaired by Volcker. Between meetings, the committee members somtimes make decisions on the telephone to change their policy instructions to the Fed's operators in the markets, or to raise or lower the discount rate--the interest rate at which the Fed will lend reserves to banks.
The other members of the FOMC include the president of the Federal Reserve Bank of New York, who is responsible for carrying out the market operations agreed upon by the FOMC, and the presidents of four other Federal Reserve banks, who serve rotating terms.
In addition to its role in making money policy, the Federal Reserve Board is one of the most important regulatory bodies in the economy because of its power to set many banking regulations.