Though Volcker was outvoted, his Fed tenure appears solid
``Pure, absolute nonsense.'' That's the reaction of Prof. Allan H. Meltzer to the press speculation that Federal Reserve Board chairman Paul A. Volcker should feel some obligation to resign because he lost a board vote last month over lowering the discount rate.
Because of the economic might of the United States, American monetary policy is of importance to nations around the world. So the incident made news not only in the United States but abroad.
Dr. Meltzer, a professor of economics and social science at Carnegie-Mellon University, likens the situation to that of President Reagan and the House vote on his proposal for $100 million of funds for the Nicaraguan ``contras.'' The President lost, Meltzer noted, ``and no one expects him to resign.''
This expert on monetary policy continued: ``There are always differences of opinion. That is what makes a democracy. I would lose respect for [Volcker] if he resigned over this minor thing.''
This flap at the Fed probably wound up last Friday with the resignation of vice-chairman Preston Martin, one of the four governors who had voted against chairman Volcker on almost an issue of timing. The four wanted the Fed to lower the interest rate charged on loans to commercial banks.
Mr. Volcker and his two supporters on this issue preferred that the discount-rate action await rate reductions by other industrial nations. He feared that a unilateral lowering of US rates might set off too rapid a decline in the dollar.
A new governor, Wayne D. Angell, withdrew his vote for immediate action later in the day, and Mr. Volcker had the time to orchestrate a coordinated rate drop by West Germany, Japan, and then the US.
For the news media, the vote against Volcker was especially fascinating, because it had so many aspects of mystery. It involved a powerful group of seven people who deliberate in secrecy. Dissent among the governors is not rare, but airing of that disagreement in the press is uncommon.
The board meets every four or five weeks, along with the presidents of the regional banks, as the Federal Open Market Committee (FOMC) to decide monetary policy. Four of the 12 bank presidents vote on a rotating basis. And the president of the New York Fed is always a voting member. The bare bones of their conclusions are published a month later.
Usually the chairman of the Fed has had, in a quiet way, much greater influence in the board than his one vote would indicate. He controls the staff of economists and others who report to the board. He sets the agenda. He chairs the meetings.
Some board members would quarrel with the idea that the chairman dominates the board. Board members are intelligent, independent thinkers who voice their own opinions and, as the minutes show, occasionally vote against a decision. The description of dissent in the FOMC minutes, however, is generally bland, laced with economic terminology.
Although it is extremely rare for a Fed chairman to be on the losing side of a vote, the press overdid its fears for Volcker.
``Volcker is extraordinarily secure,'' says Michael W. Keran, chief economist at the Prudential Insurance Company of America. ``The press play on how Volcker has lost his credibility and control has missed the mark.''
Mr. Keran, who had sat through more than a decade of FOMC meetings when he was chief economist at the San Francisco Fed, holds that Mr. Volcker ``has proven himself not only to be powerful, but generally right [on monetary policy] since 1982. People think twice about voting against that sort of track record.''
Anthony Solomon, former president of the New York Fed, also believes the incident has not much significance. ``All parties are going to be that much more careful in the future,'' he says.
``It was unfortunate that all this got outside,'' comments Murray Weidenbaum, President Reagan's first chairman of the Council of Economic Advisers and now at Washington University in St. Louis. He too figures that the governors will ``lower the noise level'' to ensure the effectiveness of the Fed in its duties.
Dr. Meltzer says the greater threat to Volcker's power comes from the Treasury, not from within the Fed. Last September Treasury Secretary James A. Baker III got the finance ministers and central bank chiefs of the five major industrial countries to agree that the dollar was overvalued.
Volcker, notes Professor Meltzer, ``has the arms of Mr. Baker wrapped around him.'' The Fed is dragged along when the Treasury tries to coordinate international economic and monetary policy.
As for current monetary policy, the FOMC must decide how to deal with the plunge in oil prices. At a price of about $14 a barrel, the cost of US oil imports will fall some $25 billion a year. At current interest rates, that is the equivalent of an increase of more than $250 billion in the wealth of US citizens.
Meltzer is co-chairman of a well-known group of economists of the monetarist school, which regards growth in the money supply as key to the twists and turns of the business cycle and future inflation levels.
Meeting in mid-month, this Shadow Open Market Committee called for the Fed to take advantage of the oil price decline to tighten monetary policy and bring down inflation permanently to a zero level.
This group maintains that the immediate drop in inflation, as seen by this week's consumer price index decline, will be only temporary if the Fed's current relatively generous supply of money to the economy persists.
The split vote on the Board of Governors, however, hints that the Fed will not restrain money growth as much as the shadow group would like. Too many members of the FOMC are more concerned right now about slow growth of the economy than about a rebirth of inflation.