Paul Volcker Superstar

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In his testimony, Volcker sought to reassure both those who worry lest the Fed overreact to the monetary growth and those who fear that it will do too little. He acknowledged that the Federal Reserve has been tightening over the past six weeks, and hinted that it will continue to do so. But he denied that the Federal Open Market Committee, the central bank's policymaking arm, had decided last week to clamp down hard on money. The day before Volcker testified, the twelve-member group completed a two-day meeting at which it determined guidelines for the next 18 months. "We haven't taken any strong action recently," Volcker insisted. "Anything I'd characterize as drastic isn't going on at the moment."

Minutes of the previous Open Market Committee meeting in May, released the day after Volcker's testimony, revealed that the group has turned into a battleground in recent months. The committee voted 7 to 5 during the May session to curb money growth moderately. Volcker had led the majority.

Little can be known for certain about last week's Open Market Committee meeting until the minutes are published at the end of August. Volcker, however, may reveal some policy guidelines this week when he testifies to congressional committees about the group's money targets for the year.

Volcker told the Senators at his reappointment hearing that the Federal Reserve is not overly concerned about the speedup in M1 growth, because it believes the rate of expansion is largely due to technical factors. Since June 1982, more than $34 billion has poured into interest-paying checking accounts, the so-called NOW and super-NOW accounts. The Federal Reserve argues that this development has distorted the M1 numbers and that money is really not growing as fast as statistics suggest. Some economists now consider M1 to be virtually meaningless. "It's a rubber yardstick," says Anthony Frank, president of First Nationwide Savings in California.

Other experts say the entire subject of money growth is filled with confusion. "Put half a dozen economists together in a room, and they couldn't tell you what M1 really is," says John Paulus, chief economist for the securities firm of Morgan Stanley. While Paulus estimates the true gain in M1 is smaller than the numbers suggest, he believes that moderate tightening is still needed.

Volcker did manage to startle some members of the Senate Banking Committee with one brief reference to his own future. Asked whether he would serve a full four-year term if reappointed, he replied, "I do not feel committed to do so." Democratic Senator William Proxmire of Wisconsin said he was "somewhat shaken" by that admission. Volcker indicated, however, that he would stay on for at least two years. Volcker believes that the four-year terms of the Federal Reserve chairman and the President should roughly coincide. By leaving in two years, he would allow the next President to name his own man to the Fed near the beginning of the term.