A Chance to Stack the Fed

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Preston Martin, Henry Wallich, J. Charles Partee, Emmett Rice, Martha Seger. To most Americans, those names could be a random selection from a telephone book or maybe the supporting cast of the movie Revenge of the Nerds. But though they garner little recognition, Martin, Wallich & Co. are some of the most important people in America. They help determine how fast consumer prices rise, how many jobs are available and how difficult it is to get a car loan or mortgage. Obscure but powerful, they are Chairman Paul Volcker's colleagues on the Federal Reserve system's board of governors.

President Reagan will soon nominate two new members to this elite group and possibly change the course of monetary policy. Lyle Gramley resigned from the board last week to become chief economist of the Mortgage Bankers Association. In January Partee's term will expire, creating a second vacancy. When those two posts are filled, Reagan, who has already named Martin and Seger, will have picked a majority of the board. Since Federal Reserve governors serve 14- year terms, the board will bear the President's stamp long after he leaves office.

High-ranking Administration officials told TIME last week that one of the Federal Reserve posts will go to Manuel Johnson, 36, the Assistant Treasury Secretary for Economic Policy. He is a supply-sider: one of the controversial economists who were the main architects of President Reagan's program of deep income tax cuts. A former professor at George Mason University in Fairfax, Va., Johnson has also been at the forefront of the Administration's drive to reform the tax code and deregulate the banking industry.

Administration supply-siders, including Johnson, have often criticized Volcker's Federal Reserve for being too tight with the U.S. money supply and thus keeping interest rates too high. In addition, Martin and Seger, the two Reagan appointees to the Federal Reserve, have sometimes dissented from the board's decisions and called for less restrictive policies. The White House considered replacing Volcker, a Carter appointee, when his term as chairman expired in 1983, but then decided to reappoint him because of the respect he commands in the financial markets. Now, however, the openings at the Federal Reserve may give the Administration new leverage against Volcker. The chairman's reputation earns him enormous clout, and he can set the Fed's agenda, but his vote counts for no more than those of other board members, and he could be overruled by his colleagues.

The Federal Reserve's changing of the guard comes at a crucial time for the U.S. economy, which has been almost stalled. The gross national product, after expanding at a 6.8% pace in 1984, grew at an annual rate of only 1.2% in the first half of this year. Housing starts are falling, and industrial production is virtually stagnant. One sign that growth may be reviving, however, is a recent dip in unemployment. After being stuck at 7.3% for six months, the jobless rate dropped to 7% in August. The fall in black teenage unemployment, from about 40% to 35%, was particularly encouraging. Much of the improvement, though, came because many teenagers left the labor force at the end of the summer to go back to school.