CHANGE AT THE FED. Greenspan's leadership and persuasive skills will be tried
It may not be in the job description, but any chairman of the Federal Reserve System must be a diplomat. That's the view of present and former Fed officials on the appointment of economist Alan Greenspan to replace Paul Volcker in August.
The Fed chairman is not a dictator of monetary or bank regulatory policy. He is first among equals on the Federal Reserve Board, which deals with bank regulation and discount rate changes, and in the broader group that sets monetary policy, the Federal Open Market Committee. FOMC includes the seven board members and the presidents of the 12 regional Fed banks, of which five vote, including the president of the Federal Reserve Bank of New York and four others on an annual rotation.
Comments a top Fed official: ``The chairman has to lead by persuasion. Thus we shouldn't expect to see any radical changes in policy.''
``In general, the chairman's post must be one which leads through consensus,'' notes Andrew Brimmer, a member of the seven-man Federal Reserve Board from 1966 to 1974.
Depending on Mr. Greenspan's leadership ability and persuasive powers, his views may be more important than his one vote may signify. But the chairman's influence and role is probably far less than the financial markets' reaction to the change in the chairmanship would indicate. ``The instruments are the same,'' says Dr. Brimmer, an economic consultant in Washington. ``The tasks are the same.''
Greenspan will have to fight inflation along with other Fed officials, continues Brimmer. At the same time, he will try to avoid plunging the economy into recession. He may attempt to prevent the dollar from falling further.
``Alan will see the necessity to intervene from time to time in the foreign exchange market,'' predicts Brimmer. ``He may not be as big an advocate of it as Paul Volcker, but he will do it.''
Learning that Greenspan has said publicly in his consulting activity that the dollar must fall further to cure the balance of payments deficit, traders promptly pushed the dollar down on the foreign exchange markets on news of his appointment.
But in early trading Wednesday the dollar's price steadied. Both stock and bond prices moved smartly higher, showing some easing of the panic that gripped many investors first contemplating the switch at the Fed.
Greenspan has forecast a recession starting in the last quarter of 1988 and going into 1989. As Fed chairman, he will cease making such negative forecasts, since top economic officials traditionally do not predict bad economic news. In most areas, Greenspan's views are considered close to those of Volcker. ``There won't be a great difference,'' maintains Brimmer.
Even those appointed to top Fed positions with apparently more unusual or radical views find themselves moving to the center once in office, notes a senior Fed official. When President Reagan appointed to the board three members described as supply-siders - Manuel Johnson, Martha Seger, and Robert Heller - monetary policy analysts and the press predicted a more expansionary and inflationary Fed policy would result.
``That image is far from reality,'' says the Fed official. ``The gravity of the problems affect anybody coming on board.''
At the moment, six of the seven members of the board and at least 16 of the 19 attending the monetary policy-making FOMC meetings every four or five weeks are economists.
``It takes an economist to have sufficient confidence in his or her own analysis to defend those views against the group,'' says Brimmer, who attended FOMC meetings for eight years. ``Non-economists unconsciously tend to recede in policy discussions. They are a bit uncomfortable. They are not pacesetters.''
That independence of thinking means that Greenspan, like his predecessor, could sometimes find his own views overridden.
William McChesney Martin, chairman of the Fed during the 1960s, always spoke last at FOMC meetings, thus learning the consensus view before deciding whether to press ahead with a vote. He liked always to have a majority of both the board and the FOMC with him.
Arthur Burns, appointed chairman by President Nixon in early 1970, let his views be known first, hoping to influence those who spoke afterward. He would put off votes if he suspected he would lose.
What style of leadership Greenspan will follow remains to be seen. But it is noted that his management of the commission on the social security system showed he is ``pretty adept at diplomacy.''