The market was doing fine January 8, even with the unemployment rate inching down to 6.8%, a number reported before the market opened; at noon the Dow was up three points. The ferocity of the afternoon slide coincided with the 3-to-2 vote at the Fed upholding Volcker's move against junk bonds, plus the Henry Kaufmann item on the wires that the Fed won't be cutting the discount rate.
Volcker's not at all happy with his position, especially with the stink raised by the White House over his move on junk bonds. A January 3 Evans & Novak column labeled "Volcker the Lame Duck," indicated the anger of Reagan aides over the junk bonds, and that he was going to be out in the cold for the remainder of his term and certainly couldn't expect reappointment. The column caused dismay in Volcker's office, suspecting it reflected the views of Donald Regan (and his aides -- incl. Sprinkel), and that the junk bond fracas was being used as a pretext to humiliate Volcker.
When the truncated Fed Board of Governors voted 3-to-2 to support Volcker, even after he had modified the rules to pacify the White House, it was taken as a sign that the Administration was prepared to totally sacrifice the harmony of the economic team to settle old political grudges with Volcker and put him in his place. Had Preston Martin voted with Volcker, and there was hesitation at the last moment before he did not, pressure would have been off Volcker, harmony would prevail, the discount rate would be cut, and the stock market could continue its climb.
Instead, the vote left Volcker feeling more embattled. The news of the unemployment rate decline took on more significance, for it added to the list of reasons Volcker could give for not cutting the discount rate --which is what the Administration wants him to do. When Kaufmann announced his view that there would not be the rate cut the markets had already discounted, it had the ring of credibility. It would now seem almost an act of supplication on Volcker's part to initiate a rate cut after having been dealt with so harshly, disproportionately on the junk bonds! And what of the Treasury-Fed-White House harmony built last September around the G-5 meeting? How warm and friendly will Volcker be as the tax bill moves through the Senate? Can we expect him to be understanding on Gramm-Rudman? Maybe, but it would be a lot easier if he hadn't been pushed around.
It must be occurring to some of the people at the White House and Treasury that their public campaign against Volcker was an expensive one. A day later, we hear that Donald Regan thinks the junk bond rule isn't so bad, considering the modifications Volcker made. He has to say so publicly. If they want Volcker back on their side, in a position where he can confidently lead a cut in the discount rate, and move with them on G-5, Gramm-Rudman without tax increases and tax reform, they've got to be nicer to him. Until this is arranged, Wall Street is not overreacting by marking down stocks and bonds.