Wayne Angell, one of President Reagan's new appointees to the Federal Reserve Board, looks back at the time that he and fellow governor Manuel Johnson forced a reduction in interest rates early this year over Chairman Paul Volcker's initial objection.
"Johnson and I, as new members of this board, we really put our careers on the line," Angell said in an interview. "And let me tell you, I thought very carefully about it, and I only did it because I was so convinced it was right."
Angell said that as early as November and December 1985, when he was at the Kansas City Federal Reserve Bank, he had begun arguing that a weak economy demanded a discount rate cut. That was also the position of former vice chairman Preston Martin and governor Martha Seger.
Now, however, after two nearly unanimous reductions in the rate to the present 6.5 percent level, and despite a sluggish economy, there seems to be a disposition at the board not to jump ahead too quickly with another reduction.
"I don't like to see us get in the position whereby we pile discount rate cuts on top of discount rate cuts without having a chance to see the effect of the last one," Angell said." We are going to have to wait and see what the facts are." And Johnson, the new vice chairman, agrees.
Angell makes clear that, ultimately, interest rates are going to fall farther. Given a worrisome deflation in commodity prices around the world, Angell says that "If conditions continueju . . . there will be a point in time when it's going to be essential for the world economy to have some lower interest rates."
Although Wall Street, worried by plunging industrial production and retail sales, is pressing for a new stimulus to the economy now, others on the board seem to be falling in line with Angell's and Johnson's wait-and-see counsel. Governor Emmett Rice voted against the last rate reduction, anticipating that the economy will get better without further stimulus.
Governor Henry Wallich told me that -- like Volcker -- he is inclined to go slow anyway, concerned that a new discount rate might touch off another slide of the dollar, which would make foreign goods more expensive, and thereby add a new inflationary pressure. That makes at least five out of the seven governors against a discount rate cut now. A weakening economy, of course, could change that perspective.
Angell and Johnson stress that their goal last February was not to push Volcker out (a published 4-3 vote against the chairman on a discount rate issue might have triggered Volcker's resignation), but to force a dialogue on the need to lower the discount rate. The issue was settled when Volcker took the initiative to compromise, offering to "sell" the Fed's consensus view in Frankfurt and Tokyo, in exchange for the majority's willingness to hold off for a couple of weeks.
Until the four opponents played hardball, Volcker offered no guarantees that he could get Germany and Japan to lead the way. "I don't think he Volcker anticipated the intensity with which we wanted a coordinated interest rate cut -- soon," Johnson said. So Angell and Johnson decided to force the issue, by joining with Martin and Seger, already on record favoring lower rates.
"The case was overwhelming," Angell says, but they couldn't get Volcker to talk about it. Now, says, Angell, "I'd like to have some people tell me in hindsight, did the discount rate need to be cut in February? And I presume the unanimous opinion, looking back among everybody, is that it had to be."
Just minutes before the board's press office was scheduled to release word of the 4-3 decision, Volcker called Angell and Martin to his office, and after some verbal sparring, agreed to press West Germany and Japan to lead the way. The two dissenters agreed that the 4-3 decision would be canceled. On March 6, after the Germans and Japanese led the way, the Fed voted unanimously to lower the rate.
"It would've been foolish for two new members of the board to take a position simply over a matter of one week or two weeks," Angell said. "But it did make a difference whether we cut the discount rate or not. And I didn't want an economic issue to complicate a leadership issue. And, by maintaining the working relationship with the chairman as our leader, it was a total win situation, as far as I was concerned."
A main theme that emerges from these interviews is that the bitter feelings have faded into the background, and a much more collegial and cooperative spirit prevails. Volcker's singlehanded rule of the board has given way to a more genuine participation by most of the other members, although Volcker, with a solid majority in the policy-making Open Market Committee, is the dominating force.
Thus, what Angell says was once a "pseudo-collegiality," at a time when Volcker felt that Reagan was stacking the board against him, has become what he calls a "bona fide give-and-take collegiality." Meanwhile, Martin, whose ambitions to succeed Volcker as chairman gave the discount rate effort an unfortunate political twist, is gone. So is a Gang of Four. What is left is probably a stronger institution.