Hunker down. The President's press conference last night wasn't quite a disaster, but it was awful. The White House never expected Fritz would come out of S.F. with a united party and a Gallup Poll showing Mondale-Ferraro up 2 pts., 48-46, over Reagan-Bush. The high command is rattled. Mondale, the lifelong liberal, has transformed himself into a George Bush/Bob Dole Democrat: Higher taxes, balanced budget, no more spending, flag-waving, family values, etc. RR should have categorically denied Fritz's charge that taxes have to be raised in '85, but Jim Baker prevailed (with Stockman's help) in keeping an '85 tax boost alive. Baker frets about being beat up on the deficit issue. Mondale must be exultant, trapping RR into this fiscal box, fighting on terrain that will keep RR off balance. As long as RR won't tackle Volcker's deflation he's in this bind. We thought Meese, Treasury staff, Baker, Darman and the Prez were tuned into the fact that the Fed is setting interest rates high, fueling the deficit. But RR's answer on interest rates, blaming "market psychology" and undue "fear of inflation" indicates he really doesn't have a clue. The Reagan politicos, Spencer, Rollins, Nofziger, we hear, would love to blast the Fed. But Regan, Baker, fear Wall Street bankers and Mondale charges of playing inflationist politics with the Fed. Regan seems hopeless. If this were '80, candidate Reagan would swing freely, but as President he seems muscle bound. The West Wing makes excuses about Mondale's Gallup lead, saying it was Fritz's convention exposure, and RR will make it up in Dallas. But if he can't turn the Fed around, he'll lose steady ground to Mondale as the deflation bites deeper, spreading from the farm sector and commodity producers into the industrial and service sectors. The Dow could lose 200 points or more by election day at this rate, making an '85 recession unavoidable, forcing the voters to turn to Democratic inflationist policies to end this GOP/Volcker crunch. Will a turn come at the Fed? Not without some heat from the White House. The first half GNP numbers, especially the 7.5% 2nd Q, have mesmerized Washington. The Fed doesn't have to explicitly tighten further to unwind the economy as global demand for liquidity beats against flat bank reserves. The last time gold was at $335 the Dow was at 840. An international debt crisis, threatened defaults in Latin America, could loosen things up. But remember, after Mexico forced the Fed to loosen in August '82, financial markets rallied, but the deep recession still took six months to play itself out. Unless the White House gets its act together swiftly (not likely) the Dallas convention August 20-24 will be totally defensive, played against the sliding stock market and buoyant Mondale-Ferraro polls. With this backdrop, Mondale could neutralize RR on the growth issue and win on the other issues; Bush, always terrible in debates, would look sick against Gerry. Upcoming RR campaign strategy looks silly. Visits St. Ann's Catholic Church in Hoboken (a lot of Italians there, get it?) and black church, while refusing to address Urban League. TV campaign will blast Fritz-Gerry "liberalism," which Mondale renounced in S.F., and play up the recovery as it crumbles under us. Jim Baker, who blew his own Attorney General's race in Texas, guided Jerry Ford to defeat in '76, and captained Geo. Bush's ship in '80, could blow the biggest one of all. Hunker down.