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Nobody Can Rattle the Market Like Paul Volcker

July 26, 1986

NEW YORK (AP) _ Paul Volcker’s congressional testimony about the economy this past week was widely considered neutral and even predictable, but the Federal Reserve Board chairman still rattled the credit markets and compelled bond traders to scrutinize his words for clues about the central bank’s plans.

It underscored the powerful position of the 58-year-old Fed chairman, whose remarks - and even his tone of voice - can strongly influence the mood of the market.

Volcker’s influence on the financial markets is so deep that some business news-wire services race to report any utterance or rumored utterance, foreign- exchange dealers sweat before he speaks and bond traders halt whatever they’re doing to listen and speculate.

A pack of reporters, known as ″Volcker’s Vultures,″ tails him everywhere he makes a public appearance. They have taught the 6-foot-7, cigar-chomping economist, who has been Fed chairman since 1979, to be extremely wary with his words.

″The fact of the matter is that when he is scheduled for any major address, before Congress or trade groups, the markets tend to stop, and it gets increasingly difficult to get business done when people just pull in their horns and sit on the sidelines,″ said Ted Palatucci, chief of the national and municipal bond department at Merrill Lynch & Co. in New York.

″I don’t think there’s anybody who has more of an effect on fixed-income markets,″ Palatucci said. ″His potential impact on what we do can be immeasurable.″

Volcker told the Senate Banking Committee on Wednesday that the Fed can do little by itself about the economy’s lethargic growth, which has been blamed largely on the growing U.S. trade deficit and the depressed farming and energy sectors.

He exhorted West Germany and Japan, the most powerful U.S. trading partners, to stimulate domestic demand for goods and services in their own countries and stop relying so much on exports to American consumers.

But Volcker also indicated he was not terribly concerned that interest-rate cuts could hurt the dollar’s value and incite inflation, thereby implying to some people that he was not opposed to further rate reductions.

While many analysts viewed his testimony as balanced and unsurprising, others interpreted it as a sign that Volcker sees few reasons to cut the Fed’s discount rate any further to stimulate domestic borrowing and economic growth.

The discount rate, the Fed’s loan fee to financial institutions, is one of the central bank’s major levers on the economy. It has been cut three times already this year and now is 6 percent, the lowest since 1977.

Bond prices, which move inversely to interest rates, dropped in nervous activity after Volcker spoke and fell again on Thursday as the market absorbed and contemplated the possible signals in his testimony.

″He went out of his way to read his whole prepared remarks, which were quite lengthy,″ Palatucci said. ″The interpretation on the street was that he’s very, very concerned about the lack of world growth.″

Some bond-trading houses are so sensitive to what Volcker says they dispatch emissaries to watch him speak. Maria Ramirez, a bond analyst at the New York investment firm Drexel Burnham Lambert Inc., sat behind Volcker when he testified before the Senate committee, though she said later there was nothing new to be discerned.

″His remarks are always so even on both sides,″ she said. ″You can never really point either way.″

Dennis Coleman, a government-bond dealer for Bear Stearns & Co. investment firm, said he believes psychology plays a large part in the bond market and Volcker’s remarks contribute to the mood.

No matter what Volcker says, Coleman said, ″a trader is not going to trade immediately on the news, but it’s certainly going to have an effect on his thinking. That’s the psychology I’m talking about.″

Many bond traders are so used to second-guessing what Volcker’s statements mean that they don’t question the system, which contributes to the extremely competitive and stressful nature of their business.

″It’s been this way for a very long time,″ said David L. Stone, an analyst at the Beacon Hill Mutual Fund Inc. in Boston. ″We can’t anticipate what should be done. We have to anticipate what will be done.″

End Adv for weekend editions July 26-27

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