Paul Volcker Superstar

The Fed chairman must cool off money growth without halting the recovery

The cameras rolled beneath the television lights, and nearly 200 standing onlookers strained to get a view. The object of all the attention was towering (6ft. 7½-in.) Paul Volcker, who was discussing the outlook for money growth and interest rates before a congressional committee that held hearings on his reappointment as Federal Reserve Board chairman. The rumpled, cigar-puffing Volcker has become the staid financial community's first superstar. So great was the interest in his remarks that the 3½-hour session had to be moved from the Senate Banking Committee Hearing Room to the cavernous Caucus Room, the scene of the Watergate hearings and the Senate's most ornate special chamber. Declared Republican John Heinz of Pennsylvania at one point in the hearing: "We're lucky to have you as chairman."

Volcker's appearance had aspects of high drama, even though his reappointment is certain, because he now faces what may be his toughest test as head of the Federal Reserve. The task: to slow down the growth of money without killing the economy's recovery. The money-supply measure known as M1, which consists of cash and bank checking accounts, has been growing recently at a blistering pace. The key indicator rose at an annual rate of 14.1% to $512 billion during the first half of the year, far above the Federal Reserve's target range of 4% to 8%.

That runaway expansion is forcing the Fed to make delicate decisions. Volcker could push interest rates up sharply to slow money growth, but that would risk aborting the seven-month-old recovery. A big jump in credit costs could also cripple the ability of such borrowers as Brazil and Mexico to repay their U.S. bank loans. "We're going through the moment of truth," says Republican Congressman Jack Kemp of New York, a leading critic of tight-money policies. "What the Fed does now will determine the fate of the economy for the rest of the year, perhaps longer." Kemp said that President Reagan should withdraw Volcker's name from renomination if the Fed squeezes too hard.

Some economists, on the other hand, fear that the Federal Reserve will reignite inflation, which now is running at less than 5%, if it does not halt the M1 expansion. The Government reported last week that producer prices rose at an annual rate of 5.6% in June. A renewed outbreak of rising prices would boost interest rates and eventually slow the recovery. Asserts former Treasury Secretary William Simon: "Unless somebody bites the monetary bullet, we're destined to pay the inflation penalty."

Quotes of the Day »

Get & Share
HANS MONDROW, East Germany's last communist prime minister, on the East German soldiers who ignored orders to shoot to kill those crossing into West Germany and made the decision to open the border on Nov. 9, 1989
For use in rail of Articles page or Section Fronts pages. Duplicate and change name as necesssary to distinguish.

Time.com on Digg

POWERED BY digg

Quotes of the Day »

Get & Share
HANS MONDROW, East Germany's last communist prime minister, on the East German soldiers who ignored orders to shoot to kill those crossing into West Germany and made the decision to open the border on Nov. 9, 1989

Stay Connected with TIME.com