The selection of Alan Greenspan, installing ''Dr. Pain'' at the Federal Reserve, is the reaction of a caretaker administration more interested in damage control than its long-range economic strategy.

Dr. Greenspan is an odd choice for an administration consecrated to economic growth. While his ideological orientation has grown indistinct over 20 years as a national economic headliner, Greenspan has consistently tilted toward austerity. He has publicly predicted a post-election recession in 1989 and privately added that it might be necessary.

Surrounded by Reaganite growth advocates on the Fed, Greenspan could not duplicate Paul Volcker's 1981 tight-money feat in bringing the economy to its knees, even if he wanted to. But Greenspan's comparative impotence as the Fed's new boy, unfamiliar with central banking, surely does not explain his selection. Rather, White House chief of staff Howard Baker wanted to give maximum reassurance to Wall Streeters and thought Greenspan could do it.

If so, why then not reappoint Volcker, the demigod of Wall Street? Volcker was in fact offered a third term. It is far from clear he would have accepted even with the president on bended knee, or even if promised freedom from White House criticism and a say in filling a current Fed vacancy. Insiders report that the chairman has worried for months about his physical and financial condition and wanted to leave.

He also wanted a say in naming his successor and recommended Greenspan. Why would America's most powerful central banker bless an economic analyst and forecaster unfamiliar with the Fed and its issues?

Although Greenspan's nagging for a tax increase has not made him a Reagan favorite, the president does not reject staff recommendations in the absence of viable alternatives. The other two names put before him were not viable: Beryl Sprinkel, chairman of the Council of Economic Advisers, and Deputy Secretary of State John Whitehead.

More unusual was the acquiescence by Treasury Secretary James A. Baker III. He was not overly impressed by Greenspan's much-lauded performance as chairman of the Social Security reform panel in 1982-83 when payroll taxes were massively increased. Nor was Baker enchanted by Greenspan's criticism of his efforts to coordinate world monetary policies.

But Howard, not Jim, was the Baker with the action. The chief of staff did not want the president to go to Venice with the Fed chairmanship in doubt. There was anguish in White House corridors anticipating market reaction to Volcker's departure. Although Greenspan would do little for Tokyo, Frankfurt or London, it was presumed he would reassure Wall Street's bond traders, obsessed with inflation worries.

That illustrates how far off base White House damage-control mentality really is. The bond market would have reacted with semi-hysteria to any Volcker replacement. Even a radical choice would have had trouble surpassing Tuesday's bond and dollar collapse and gold rally.

What Greenspan does give the administration -- four years too late say many conservatives -- is a Republican chairman at the Fed. Although venerated in the financial community, Volcker is still a Democrat and Jimmy Carter's last appointee. He may not be a ''liberal'' (as one senior administration official described him to us), but he is a regulationist who clashed both with his Reaganite Fed majority and the Reagan administration on bank deregulation. In contrast, Greenspan will cooperate.

He also is likely to be more sensitive to White House wishes on macro-economic policy in an election environment, but the long haul may be different. Greenspan suggested in a closed economic conference this year that if the next president does his job right, there will be an inflation-killing recession in 1989-90. He can be counted on to harp on the budget and trade deficits and plug for higher taxes.

The fact that no new chairman could duplicate Volcker's 1981-84 domination of the Fed suggests that the appointment carries less importance. But other possibilities might have wielded greater influence. Switching James Baker to the Fed was rumored but never seriously discussed. Former vice chairman Preston Martin, who kept Volcker from presiding over an election-year squeeze in 1984, was not even rumored.

Vice Chairman Manuel Johnson never got a serious look from Howard Baker. For five years at Treasury and 18 months at the Fed, Johnson has advocated growth and become an increasingly astute practitioner of monetary policy. He would have been the first chairman in memory not to blame monetary shortcomings on congressional budget policy. Naming a 38-year-old to head the central bank would have enlivened an aging administration, but would have been less in character for today's White House than elevating ''Dr. Pain.''