Last week's White House shake-up hasincreased the odds that Federal Reserve Board chairman Paul
Volcker, a symbol of strength in a government reeling from the
arms-to-Iran scandal, will serve a third term, sources close to
the Fed say.
    But they said that no decision on the appointment, which
must be filled this August, has been taken by the White House
and Volcker too has not made up his mind.
    Former White House Chief of Staff Donald Regan, who
resigned last week when ex-senator Howard Baker was named as
his replacement, was implacably opposed to Volcker and tried
often to undermine him.
    It is an open secret in Washington that Regan tried to
ensure that Volcker, first appointed in 1979 by President
Carter, will not be offered a third term by President Reagan.
    Only Volcker's key allies in the Reagan administration,
Vice-President George Bush and Treasury Secretary James Baker,
kept Regan's recent maneuvering at bay, the sources said.
    Sources close to the administration say Regan leaked a
story, quickly shot down by others in the administration, that
Beryl Sprinkel, chairman of the council of economic advisers,
had been chosen to replace Volcker.
    But as the administration's credibility was increasingly
under fire, it became clear that Regan's power to bring about
such changes was on the wane.
    The sources said New White House Chief of Staff Howard
Baker has a very good relationship with his namesake at the
Treasury Department and is likely to respect his views on the
Fed chairmanship.
    As a moderate Republican, Baker is also unlikely to share
the right-wing's opposition to Volcker.
    "This new White House is going to need all the strength it
can get," said one source when asked about the possibility of
Volcker's reappointment.
    Paul Volcker is deeply respected in financial markets both
in the United States and around the world. At a time when the
stability of the dollar and the viability of major debtor
nations are in question, Volcker's departure would definitely
undermine U.S. leadership, foreign exchange analysts say.
    U.S. officials say Volcker works very closely with Treasury
Secretary Baker on issues like international debt and global
economic cooperation.
    The two men seem only to differ on how far to deregulate
the banking industry, but recent statements by Volcker, in
which he adopted a more liberal attitude on deregulation,
signalled the politically-independent central bank is coming
around at least partially to the Treasury position.
    And a recent statement by a Reagan administration official
that the two men saw "exactly eye-to-eye" on the dollar was seen
as an indication of Baker's support for the Fed chairman.
    Baker is understood to have played a key role in Volcker's
reappointment to the Fed in mid-1983.
    The sources said Baker respects Volcker and when appointed
Treasury Secretary in February 1985, he decided to ensure a
good working relationship, in part because he believed the two
key government economic institutions have to work closely.
    Regan, Treasury Secretary during President Reagan's first
term, was formerly head of Wall Street's largest brokerage firm
Merrill Lynch and came to Washington determined to be America's
pre-eminent economic spokesman.
    He developed a deep antipathy for Volcker, whose political
skills undermined that ambition, and who financial markets took
much more seriously.
    But the sources said Volcker would have to be invited to
stay. "Is the president going to ask him? he wouldn't stay
otherwise," said one. "He'd have to be asked," said Stephen
Axilrod, formerly staff director of monetary policy at the Fed
and now vice-chairman of Nikko Securities Co. International.
    Otherwise, the list of potential candidates is not
awe-inspiring. And if Volcker left this Augsut, he would leave
behind one of the most inexperienced Fed Boards in years.
    Many analysts believe this lack of collective experience --
the four sitting members were all appointed within the last
three years -- is dangerous, coming at a time when the global
economy is threatened by instability.
    An experienced successor, therefore, would seem a
necessity. One widely mentioned possibility is Secretary of
State George Shultz, whose experience as Treasury Secretary
under Preesident Nixon and background as a trained economist
would make him ideal.
    But Shultz too may have been damaged by the arms-to-Iran
scandal, while vice-chairman Manuel Johnson is regarded at 37
years old as too young for the job.
    Other potential candidates include economist Alan
Greenspan, frequently an informal presidential economic
adviser, New York Fed President E. Gerald Corrigan, Federal
Deposit Insurance Corp chairman William Seidman, and Sprinkel.
    Long a Regan protege, Sprinkel's chances may be damaged by
his patron's departure from the White House.
 Reuter
