A typographical error changed the meaning of a sentence in Hobart Rowen's column yesterday. It should have read: "If the G-R-H deficit targets are met, additional monetary ease, which takes effect with a time lag, will be needed to compensate for the tighter fiscal policy, the effects of which are felt quickly."
Beginning last fall, some of the smart money around town began writing the political obituary of Federal Reserve Board Chairman Paul A. Volcker. Business Week, for example, ran a cover line asking: "Is Paul Volcker Being Forced Out?" Inside, the magazine answered in the affirmative.
It predicted that Volcker's power would soon slip: to take the seats of two governors who had by and large supported Volcker, President Reagan had nominated Manuel Johnson (a supply-sider from the Treasury) and Wayne Angell (a Kansas farmer/professor backed by Senate Majority Leader Bob Dole).
The idea was that Johnson and Angell would team up with Vice Chairman Preston Martin and Martha Seger (earlier named to the board by Reagan) to make an anti-Volcker "Gang of Four" on the seven-member board. So, the theory went, Volcker would soon do what the administration really hoped he would do: pack his bags and go.
There are all sorts of things wrong with this simplistic theory, including the assumption that the administration wants to get rid of Volcker, which might shake confidence in the dollar around the world. The Reagan administration does think that Volcker is too keen on regulating the banking industry. But Treasury Secretary James A. Baker III and Volcker are in accord on major monetary policy issues and work closely together on Third World debt problems.
The one substantive issue that may divide the Reagan administration and Volcker in the future is the timing of future monetary ease, as an offset to the potential deflationary impact of Gramm-Rudman-Hollings. If the G-R-H deficit targets are not met, additional monetary ease, which takes effect with a time lag, will be needed to compensate for the tighter fiscal policy, the effects of which are felt quickly. Some Reagan officials now fear the Fed will want to see the deficit reductions ensured before it moves to ease monetary policy.
But any conflict with the Fed on the need for such ease and its timing would be something for the future: There are no policy disagreements now.
In any event, the "Gang of Four" theory was full of holes. First, it betrayed a lack of knowledge of where the real power resides in the Federal Reserve system. The nation's overall monetary policy is not made by the seven-member Board of Governors, but by the 12-member Federal Open Market Committee, also chaired by Volcker.
The FOMC, in addition to the seven governors, includes the president of the New York Federal Reserve Bank and four of the other 11 regional Federal Reserve Bank presidents, who serve on a rotating basis. A recapitulation of the published 1985 votes of FOMC meetings shows support for Volcker's leadership ranging from unanimous votes to a maximum of three dissents (on one occasion). So it would take much more than a shift in the views of just two governors to change the balance of power on the Fed's main policy-making board.
Beyond that, as is true of nominees for the Supreme Court, past opinions and speeches offer little real guidance on how a prospective Federal Reserve governor will vote over a term of up to 14 years on a board that prides itself on its independence.
Insiders confide that there was a grin on Volcker's face last week after Johnson and Angell said at confirmation hearings that they found little to criticize with current monetary policy. Angell, moreover, labeled the Gang of Four talk "preposterous." The Kansas banker stressed his belief that the No. 1 priority of the Fed is to fight inflation. He used words that Volcker might well have chosen: "There is no way I will ever advocate any policy that would return this country to inflation."
There will, of course, be some changed perspectives on the Fed's proper regulatory role -- a function in the hands of the board, not the FOMC. The addition of Johnson and Angell may curb Volcker's freedom in this area. However, since Johnson and Angell have opposing views on the use of junk bonds in takeovers, Volcker apparently would be victorious in a 4-3 split if the issue comes up again. His effort to curb junk bonds was upheld 3-2 in earlier votes.
Debates within the Fed's board may also be more intense. Angell, for example, reportedly wants the Fed to pay closer attention to commodity prices in making overall monetary policy.
But neither Johnson nor Angell appears to be rigid in applying philosophical preferences. Angell isn't insisting that monetary policy be tied in lockstep to a commodity price standard. And although Johnson continues to insist that deficits do not cause high interest rates, he also holds that federal expenditures must be cut because projected deficits take "too large a share of GNP."
Adding it all up, a key Federal Reserve official grinned last week when asked how he thought policy would shape up with Angell and Johnson on the new board. "The Gang of Four theory is destroyed," he said. "I don't expect there will be any fundamental change."