Slip Sliding Away At The Fed

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The sudden opening of two seats on the Federal Reserve Board has given President Clinton an early shot to put his stamp on monetary policy. But the Administration's tortuous hiring policies threaten to squander a prime chance to moderate the Fed's inflation phobia--just as the economy takes off.

Clinton's big opportunity was created on Feb. 1 with the surprise resignation of Vice-Chairman David W. Mullins Jr. That, plus the departure of Governor Wayne D. Angell, whose term expired on Jan. 31, allows the President to name two of the Fed's seven board members.

ALREADY SHAKY. Speed is of the essence. Fed and Administration sources predict that a decision on whether to raise short-term rates is likely before Clinton's nominees join the board. That's partly because financial markets already are jittery about a Fed dominated by Clinton appointees. The White House is ready to accept a small bump in rates now but would like to appoint governors who could halt further tightening as the expansion gains momentum.

Yet the Clintonites have dawdled. At yearend, the Administration finally settled on Brookings Institution economist George L. Perry as Angell's replacement. But Perry's selection has been put on hold because of concerns about a possible conflict of interest: His wife, Dina, manages a mutual-fund stock portfolio, which can be affected by Fed interest-rate decisions. White House lawyers and political advisers are now trying to decide if Perry should be dropped. "We want to be able to tilt the outcome [against higher rates] when there's a close call, but now that we're at just such a point, we're diddling," says one Administration official.

With Perry in limbo, filling the second seat is muddled by political requirements. For one, bringing more diversity to the white-male-dominated Fed is an Administration priority. "If we send up two nominations together, at least one has to be a woman or minority--no question," says one official involved in the search. But finding the right combination of candidates is tricky.

Perry, who initially had qualms about joining the Fed, was lured with the promise that he eventually would be a top candidate for vice-chairman, a job that was not expected to come open for a year. The timing changed when Mullins, a Republican who knew Clinton wouldn't reappoint him, decided to become a partner in Long-Term Capital Management in Greenwich, Conn., a new investment firm organized by ex-Salomon Brothers Vice-Chairman John Meriwether.

Now, Perry wants the No.2 job or nothing, Administration officials say. But the high-profile appointment will only heighten the potential for confirmation questions over his wife's career. And if the President nominates Perry as Vice-Chairman, he'll complicate his task in filling the other seat with someone other than a white male.

That's because several top women prospects who previously spurned interest in Angell's slot would be willing to reconsider for the No.2 job, according to Administration insiders. Candidates include Council of Economic Advisers Chair Laura D'Andrea Tyson, Assistant Treasury Secretary Alicia H. Munnell, and Deputy Budget Director Alice M. Rivlin. Strong male candidates under consideration, all of them white, include Treasury Under Secretary Lawrence H. Summers, Harvard economist Benjamin Friedman, and Tyson's deputy at the CEA, former Princeton economist Alan S. Blinder.

Wall Street is leery of the whole process. "The market fears the appointment of someone less tenacious about sustaining the great progress the Fed has made on inflation," says Goldman, Sachs & Co. economist Robert M. Giordano.

Tyson counters that the Administration has no intention of packing the Fed with easy-money advocates. "A change in personnel will not change monetary policy for the country," she says. But in private, her colleagues concede that they wouldn't mind seeing a Fed slightly less fixated on Chairman Alan Greenspan's announced goal of squeezing the last drop of inflation out of the economy.

Clinton's nominees may yet tilt the Fed toward a more accommodating stance. But it's probably too late for Clinton to make a difference if the Fed agrees to raise interest rates by March, something the Administration now believes likely. Just another costly reminder for a President who has trouble filling government jobs that messy politics can thwart even important policy objectives.

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