Boston — There's a story going around Federal Reserve System circles that when President Carter had Paul A. volcker in to the White house to talk about his appointment last year as chairman of the Fed's board of governors, Mr. Volcker warned that he would not be a member of the administration "team."
Mr. Carter recognized the meaning of the remark. The Fed would not be an automatically in his plans for reelection.
Mr. Carter may well have wished he could have appointed a more politically sympathetic chairman. But with the Us dollar plunging sharply on the foreign-ex change markets, he had little choice but to name a chairman such as Mr. Volcker who would inspire confidence in financial circles.
There is no evidence that Mr. Volcker and his fellow monetary policymakers consciously sabotaged President Carter's political campaign. In fact, Wall street now suspects that the Fed, in order to avoid a political hassle, had been moving more cautiously than it might have otherwise in boosting interest rates as a means of curtailing excessive and inflationary growth in the money supply.
Says Citibank in its Economic Week: "The Fed might be waiting until the election is over before it makes its move."
If so, interest rates could rise once more in the days ahead. But once financial markets are convinced of the central bank's sincerity in battling inflation or the recovery weakens and possibly even reverses, then the demand for money will slow down and interest rates tumble again. Mr. Reagan's election could speed that process.
Whatever, many economists believe that the Federal Reserve botched its job both politically and economics-wise. By accident, it mistimed the creation of a recession designed to battle inflation. The original idea was to have the downturn in 1979 and thus have a good recovery under way in this election year. But the Fed created so much money in the summer of 1979 that the recession was postponed until February of this year.
To some extent, that was the mistake of the economic advisers of the 12 -member Federal Open Market Committee, the group of seven governors and five Fed branch presidents who decide the nation's monetary policy. These advisers though it possible to control the money supply by pegging interest rates. This proved impossible, and the Fed changed its procedures in October 1979 to put a higher priority on controlling the monetary aggregates directly.
But it was too late. The 10 percent growth rate in the money supply from March to October was too much. It not only delayed the long-forecast recession; it, together with a secondary factor of doubled oil prices, prompted a renewed burst of inflation. The consumer price index moved upward at an 18 percent rate last winter.
Then the Carter administration panicked. In March it ordered credit controls on an economy already slumping. Alarmed consumers cut back dramatically on their spending, pushing the economy into its fastest decline in modern history. The economy was in a mess. So were Carter's election prospects.
With the lifting of controls and another unplanned rapid boost in the money supply, the economy showed solid signs of recovery by election time. But inflation remained high (12.7 percent at an annual rate in the latest month; a 7 percent annual rate over the last three month). And the expansion had not lasted long enough to reduce the public's feelings of economic malaise.
Surveys of those emerging from the polling booths showed that the economic situation was the prime reason for rejecting President Carter. Ronald Reagan, most voters decided, would do a better job in managing the economy. Many economists would agree. Here's why:
* Mr. Reagan and his economic advisers are more "monetarist" than President Carter and his advisers.
Insiders say that in its waning months the Carter economic team had become much more conscious of the need to limit the growth of money to reduce inflation. Charles L. Schultze, chairman of the Council of Economic Advisers and long regarded as a neo-Keynesian, modified his views, it is said. During internal debates over policy, Mr. Schultze sometimes argued for a stern monetary stand.
Nonetheless, President Carter chose to attack the Fed, just before the election, for pushing interest rates too high. This populist stand probably cost Mr. Carter the support of many who regard the Fed, perhaps mistakenly, as the strongest bastion against inflation.
Earlier, in 1976 and '77, the Carter administration made the basic mistake of believing it could stimulate a faster recovery without reigniting inflation because of high unemployment and surplus industrial capacity. It stepped up federal spending. It encouraged the Fed to follow an easy money policy. The result was a solid recovery -- but also accelerated inflation.
* President-elect Reagan is likely to be somewhat more conservative in his federal spending policies than Mr. Carter.
President Carter talked a tough fiscal policy. But federal outlays went up 17 percent in the fiscal year ended Sept. 30, well above the rate of inflation. Mr. Reagan's campaign rhetoric indicates a desire to shrink federal government drastically. But his bark will probably prove worse than his bite in cutting federal spending.
Mr. Reagan remains somewhat of a mystery man in economics. His choice for such economic slots as chairman of the Council of Economic Advisers and secretary of the Treasury should tell much. If these jobs are given to such people as Charls E. Walker (a Washington lobbyist), George P. Shultz (Treasury secretary under President Nixon), William E. Simon (Treasury secretary under President Ford), or Alan Greenspan (Mr. Ford's top economic adviser), then his administration will be moderately conservative, typically Republican in character. If such nontraditionalists as economist Arthur Laffer or US Rep. Jack Kemp get these jobs, then the country will be facing a real change.
Whatever, Mr. Reagan's election assures the nation of a sizable tax cut. Congress has a habit of altering the tax proposals of presidents. The House with its key Ways and Means Committee remains in Democratic control. But the size of the conservative sweep across the nation means Mr. Reagan will have legislative clout.