Federal Reserve Chairman Paul A. Volcker, the architect of federal government efforts to curb inflation, resigned yesterday, and President Reagan named economist Alan Greenspan as his replacement.
Reagan appeared for one minute in the White House briefing room to accept Volcker's resignation "with great reluctance and regret" and praise his efforts to bring inflation under control. The president said "my dedication to our fight to hold down the forces of inflation remains as strong as ever" and added that Greenspan "shares the same commitment."
The announcement, which came a day before Reagan departs for the economic summit of the industrialized democracies in Venice, produced a 10-point drop in the stock market and caused the dollar and bond prices to tumble. The changeover at the Federal Reserve Board came as a surprise on Wall Street after several published reports suggested that Volcker, whose anti-inflation policies were popular with business, would be reappointed to a third four-year term as chairman. His current term expires Aug. 6, but he could remain until Greenspan is confirmed.
Volcker's resignation was greeted with concern on Capitol Hill, particularly among Democrats. Senate Banking Committee Chairman William Proxmire (D-Wis.) said it was "Volcker's unpopular policies that broke the back of inflation" and called his departure "a serious loss for the country."
But several financial market analysts said that monetary policy was unlikely to change under Greenspan and predicted he will be at least as tough in combating inflation as Volcker.
"Volcker leaves a legacy of having beaten back inflation," said Jerry Jasinowski, chief economist at the National Association of Manufacturers. "Greenspan's first requirement will of necessity be to out-Volcker Volcker by working for dollar stability and defending the currency against inflation."
Greenspan, 61, served as President Gerald R. Ford's chief economist and won Reagan's trust when he chaired a 1983 presidential commission that worked out a compromise on the politically sensitive issue of financing Social Security.
While senior administration officials said that Reagan had asked the politically independent Volcker to stay on for a third term, some officials suggested that the White House will be more comfortable entering a presidential election year with Greenspan as chairman of the board.
"Having someone attuned to politics is better than having someone who isn't," said one official.
Nonetheless, a senior White House official said the third term was "Volcker's for the asking, but he didn't ask" and didn't want to stay.
"There's a time to come and a time to leave," the 59-year-old Volcker told reporters, chomping on the cigar that has become his trademark.
Senior White House officials said Volcker first hinted at his departure during a chat with White House chief of staff Howard H. Baker Jr. at a reception before the annual Gridiron Dinner of Washington journalists on March 28. These sources said Volcker had personal reasons for leaving but also acknowledged that he was tired of battles within the administration on a strategy to reduce the federal budget deficit.
At Volcker's request, Baker visited him at the Federal Reserve on May 26. "Volcker told him that he had agonized over the decision and decided he should not accept a third term," a senior official said.
But Baker replied that the president wanted him to stay and advised Volcker to "think it over carefully" on a fishing trip that began the next day. The sources said Volcker returned from the fishing trip still resolved to leave and informed both the White House chief of staff and Treasury Secretary James A. Baker III of his decision Friday.
The president, Volcker and the two Bakers met in the White House residence on Monday afternoon. According to one source, Reagan was "surprised" that Volcker had come with a letter of resignation but told him he would like him to stay for a third term. Volcker told reporters yesterday that he told the president "with considerable definiteness" that he wanted to leave the board.
When Volcker was asked whether Reagan had asked him to stay, he did not answer the question directly but replied, "I had no feeling I was being pushed." Officials said he used the same words at the Monday meeting in the White House when James Baker said that the president was "serious" about offering Volcker a third term.
Volcker and both Bakers joined in recommending Greenspan as a replacement, sources said. Reagan telephoned Greenspan late Monday afternoon and offered him the job. Greenspan immediately accepted.
The Federal Reserve Board regulates America's 12 federally chartered banks and controls the nation's flow of money, making it one of the world's most influential economic forces. Soon after President Jimmy Carter named him chairman in 1979, Volcker vowed to reduce inflation and then-soaring interest rates.
After a board clampdown on the money supply, the nation entered a severe recession, but inflation and interest rates dropped sharply.
Greenspan's appointment assures Reagan of a strong legacy on economic policy for years after he leaves the White House. Every member of the board has been appointed by Reagan.Staff writers John M. Berry and Hobart Rowen contributed to this report.