Paul Volcker Superstar

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Despite the prospect of moderately higher interest rates in the near future, economists are hopeful that the recovery will stay on course. "We have an economy that is bursting with energy," says Allen Sinai, a senior vice president of Data Resources, an economic forecasting firm. A new crop of 3 Government reports indicated last week that the strong upturn is continuing. U.S. industrial production rose 1.1% in June, the seventh monthly increase in a row, while June retail sales gained .7%. Says Walter Heller, chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson: "A percentage point increase on the interest rate would not abort the expansion because it's got a lot of speed—but then it needs a lot of speed." He added, however, that "it would be dangerous to tighten too much." Observes Alan Greenspan, who was President Ford's chief economic adviser: "Higher interest rates now will have very little effect on the short-term economic recovery."

If interest rates continue to rise, Volcker will probably be blamed, even though the cause may be fiscal rather than monetary policy. Senator Proxmire told the Federal Reserve chairman last week that in his new term he would face "condemnation, denunciation, criticism." Said Proxmire: "You start off with the warm approval of almost everyone, and with the blind high hopes from everyone that somehow you can keep interest rates down." But Proxmire added that this was impossible in view of federal budget deficits. Even superstars cannot do the impossible. Said Proxmire: "You just won't do it. You can't. No one could."

—By John Greenwald.

Reported by David Beckwith/Washington and Bruce van Voorst/New York