Top Federal Reserve officials are always worried, sometimes a little, sometimes a lot, about what Congress may do next to make life more difficult for those at the nation's central bank. In recent years, a few members of Congress have tried to do a great deal.
The Fed officials worry partly because the Federal Reserve System is, technically, a part of Congress. However much the Fed may cherish its independence and depend upon it when fending off demands and complaints from the Executive Branch, any direct order from Congress must be obeyed, the officials say.
That is why the Fed has been so concerned for the past several years about attempts by some members of Congress to force it to tie the course of monetary policy to some kind of rigid standard such as changes in the price of gold or other commodities. And that is why Walter Fauntroy, the District of Columbia's nonvoting delegate to Congress is so much appreciated at the Federal Reserve.
In 1981, Fauntroy, who cannot vote on the floor of the House but who does vote and has seniority in committees, became chairman of the domestic monetary policy subcommittee. The committee's jurisdiction includes the Federal Reserve. Senior Fed officials give him high marks on the job he has done.
"Walter has gotten interested in the Federal Reserve and spent a lot of time on us," one such official said. "He has an open mind and interest in the institution. He doesn't come with any axes to grind."
The "axes" the official has in mind are such items as a rigid focus on growth of the money supply or the use of a so-called commodity standard in choosing and implementing a monetary policy. But that doesn't mean that Fauntroy has no quarrel at all with current Fed policy, which has been strongly targeted at reducing inflation.
"We have done enough on inflation," Fauntroy declared flatly. "Now people are hard-pressed by unemployment and the cuts in federal programs that provide help for people. I want cuts in unemployment even if inflation rises a little, and I want lower interest rates to help housing."
Some Fed officials might go along with Fauntroy's priorities, given the lack of progress in cutting the nation's 7 1/4 percent civilian unemployment rate in the past year and the anemic 1 percent growth rate for the gross national product, adjusted for inflation, in the first half of this year.
However, the majority of Fed policy makers, led by Chairman Paul A. Volcker, do not think that concern about inflation can safely be turned on and off.
"If you lean purely in the direction of expansion, inflation probably . . . will get out of hand," one wary policy maker said.
On the other hand, at a recent hearing before Fauntroy's subcommittee on the Fed's semiannual report to Congress on monetary policy, Volcker himself noted that Fed policy makers had overestimated inflation in their forecasts for each of the last three years. Fauntroy believes they may be overestimating both inflation and the degree to which growth of the economy may pick up in the second half of this year.
"I don't think we can look at 4 percent GNP growth," which the Fed is projecting, the D.C. delegate said. "My primary concern is unemployment. My concern is 'the least of these.' "
This disagreement, which was evident from Fauntroy's prepared statement and questioning at the recent hearing, is not couched in strident language or with an insistence that the Fed stimulate the economy come what may on the inflation front. That may be partly because Fauntroy is so aware of the host of uncertainties that surround monetary policy and its impact on the economy.
"One of the most frustrating things about the chairmanship of the subcommittee" is not being able to know what is "right and wrong," he said with a shake of his head. "In all my previous activities, I have seen right and wrong very clearly. In civil rights, it is very clear. On housing, it was very clear. On apartheid and South Africa, it is very clear."
On many of the issues facing the Federal Reserve, right and wrong is not knowable in advance, Fauntroy said.
One of Fauntroy major objectives when he assumed the subcommittee chairmanship was "to move the Fed away from a strict monetarist view," he said. Monetarist economists believe that tight control of the growth of the money supply is the way to produce noninflationary economic growth. In its place, Fauntroy wanted a more eclectic approach, with a focus directly on economic performance and interest rates.
He feels he has succeeded, because the Fed has shifted its approach. How much the subcommittee influenced that shift is difficult to determine, because many Fed policy makers do not hold, and never have held, very strict monetarist views, even during the 1979-82 period when the Fed assumed a much more monetarist approach while trying to curb inflation.
Nevertheless, it was the domestic monetary policy subcommittee that played a major role under earlier chairmen in requiring the Fed to set and publish specific money growth targets. The central bank itself had begun using such targets back in the 1960s, but until the late 1970s, when the requirement became part of the Humphrey-Hawkins Balanced Growth and Full Employment Act, the emphasis in policy was on influencing the economy by pegging key short-term interest rates.
The late Robert Weintraub, a well-known and widely respected monetarist economist, used his job as staff director of the domestic monetary policy subcommittee to help push through the money-supply-targeting requirement.
In contrast to Weintraub, the current top staff member is Howard Lee, an attorney who has been a Fauntroy aide since the delegate first went to Congress in 1971 and a man who says "I am very much an anti-monetarist."
Lee said that Fauntroy's approach to the Fed never is based on assuming that officials there "are acting in bad faith," as some monetarists always do. Nor does the chairman assume that he or Congress as a whole necessarily knows better than the Fed precisely which policy stance is the right one.
"Why should Congress be blessed with better wisdom than they?" Lee asked. "That sometimes escapes people around here. It never escapes Walter.
"Congress' job is to make sure the Fed doesn't go too far afield. Maybe we can be influential over the long run," Lee said.
Right now, as much as Fauntory would like the Fed to concentrate on reducing unemployment -- a view shared by top Reagan administration officials -- he is very conscious of the limited options available to the central bank so long as Congress and President Reagan are unable to find a way to reduce the big federal budget deficits.
"At this point, our options are narrowing," Fauntroy said. "The Fed has gone about as far as it can without a budget fix. . . . Volcker put it just right at the recent hearings . We are borrowing more than we are saving, and we are buying more than we are producing."
Fauntroy agrees completely with Volcker's worry that a sharp drop in the value of the U.S. dollar in foreign exchange markets could generate a new burst of inflation here and make it even harder for the Fed to get interest rates down and reduce unemployment. And he also notes that such a drop in the value of the dollar likely would be accompanied by a decline in the inflow of foreign capital that has been financing that difference between saving and consumption in the United States.
Couple those dangers with the continuing problems Third World debtors pose for many major American banks, and you end up with "so many variables" affecting monetary policy that the Fed has no choice but "to play it by ear," Fauntroy said, adding that no rigid rules could possibly work as a basis for policy in this situation.
Thus, Fauntroy is telling the Fed, in effect, "Congress is looking over your shoulder as you set monetary policy, but just use your best judgment. Congress has no hammerlock on the truth."
Meanwhile, Fauntroy wants to continue to use his subcommittee to highlight the economic effects produced by the mix of a stimulative fiscal policy and a relatively tight monetary policy. The result has been some major distortions in the economy, Fauntroy said.
"There are 221,000 workers who have lost their jobs in manufacturing who have not been absorbed in services," he said. In addition, there are problems with interest rates and their affect on housing, among other things. "I want to go out to some key districts" and hold hearings to highlight these facts, he said.
Fauntroy has been particularly interested in housing ever since he headed the Model Inner City Community Organization, which had a significant role in the urban renewal of the Shaw area of the District. When he became the D.C. delegate in 1971, he naturally became a member of the District of Columbia Committee. His interest in housing -- and the strong impact of interest on it -- led him to choose the Banking Committee as his major legislative committee in 1973.
Rising interest rates had blocked some of the planned development in the Shaw area, and that led him to his current subcommittee and its oversight of the Fed. At the same time, the subcommittee had been involved in development of the Humphrey-Hawkins legislation. "I wanted to be in a position to monitor that," he said.
For the past two years, Banking Chairman Fernand J. St Germain (D-R.I.) has chosen to let the subcommittee rather than the full committee hold the semiannual Humphrey-Hawkins hearings. All the full committee's members have been invited, but few other than those on the subcommittee have come. The smaller setting, has produced some better, more focussed hearings, one Wall Street financial analyst said. "You know, the most important things Volcker said came in response to questions. Maybe he would have said them anyway, or maybe it was some of the questions," the analyst added.
As for oversight of the Fed as an institution with a dozen district reserve banks with 25 branches, Fauntroy's subcommittee has a long tradition of poking into the central bank's operations. The subcommittee for years was headed by the late Wright Patman, who also was chairman of the full committee. Patman, a populist Democrat from Texas, was a low-interest-rate advocate who was never satisfied with what the Fed was doing.
Fauntroy has visited several of the district reserve banks and met with their boards of directors. A subcommittee bill to enlarge those boards to allow more representation from the public passed the House last year but died because of a major disagreement over other banking legislation between St Germain and Senate Banking Committee Chairman Jake Garn (R-Utah).
There are a number of so-called modernization actions that Fauntroy would like to see Congress authorize, but they, too, are not likely to pass until the basic St Germain-Garn disagreements are settled, if then.
One difficulty with bringing any legislation concerning the Fed to the floor of the House is that some of the proponents of requiring the central bank to use some rigid rule in setting monetary policy probably would try to attach such a provision. "That is always the fear when you take Fed legislation to the floor," Lee said.
From a more local perspective, Fauntroy believes that his subcommittee chairmanship has been useful, through relationships established at the Treasury Department, in helping the District as it moved from borrowing at the Treasury to borrowing in the regular bond market. He says he also has arranged on occasion for local bankers to make their views known to Fed officials, including Volcker. And there have been inquiries about housing finance and interest rates.
But for most of Fauntroy's constituents, like those of all the other members and delegates in Congress, monetary policy remains a mystery -- however important it may be. "It has not gotten down to the point of people stopping me on 14th Street and asking, 'How are we doing on monetary policy?' " Fauntroy laughed.
"This is a most arcane subject. None is more removed from ordinary understanding," he said. Yet, he added, "I am dealing with the basic problems of the community: unemployment and housing."