NO ROOM AT THE FED

By John Greenwald

HE IS THE LEGENDARY FINANCIAL guru who rescued New York City from bankruptcy, advised Democratic mayors, Governors and Presidents, and, at 67, remains a superstar dealmaker on Wall Street. In short, Felix Rohatyn, managing director of the Lazard Freres investment house and high mandarin of capitalism, looked like Bill Clinton's logical choice for vice chairman of the Federal Reserve Board and second in command to chairman Alan Greenspan. But last week an irritated Rohatyn was still sitting in his Manhattan office, having withdrawn his name from consideration after it became clear that the Republican majority on the Senate Banking Committee would reject him. Rohatyn was the second Clinton choice for the seven-member Fedboard to be rebuffed in the past six months.

Rohatyn's main opponent was Florida's Connie Mack, who sits on the Senate Banking Committee chaired by Alfonse D'Amato of New York. D'Amato earlier scuttled Clinton's plans to nominate Alicia Munnell, now a member of the President's Council of Economic Advisers, for a board seat. The latest Republican intransigence left many perplexed. "By tradition, Federal Reserve appointments have not been highly political," says Princeton economist Alan Blinder, who stepped down as vice chairman of the Fed in January after just 18 months in office. "It would be a shame if we as a nation moved away from that tradition."

Clinton had pushed for Rohatyn as a counterweight to Greenspan, whose policies have stressed the virtual elimination of inflation at the expense of faster growth. "Why are we going to roll over and play dead just because someone takes a shot at [Rohatyn]?" the President demanded of his top advisers at a meeting in the Oval Office last Tuesday. But Treasury Secretary Robert Rubin and White House chief of staff Leon Panetta persuaded their boss that Rohatyn could not win Senate confirmation.

The reason, fundamentally, was ideology. Rohatyn has in recent months called for the Fed to worry less about inflation, which he feels is dormant, and more about growth. That put inflation hawks into attack mode. Republican staff members of the Joint Economic Committee, a House-Senate body that does not rule on Fed appointments, sent Mack a strident memo this month that declared, "Put simply: R-O-H-A-T-Y-N spells stagflation"--a reference to the high inflation and low rates of growth that plagued the U.S. in the late 1970s.

Rohatyn angrily denied that characterization of his views. "My record speaks for itself," he says. "I have argued for fiscal restraint, a strong currency, low inflation, a balanced budget and reform of the tax and regulatory systems." Clinton showed his own frustration during a Democratic fund raiser in New York City, where he blasted Republicans for their "outrageous political treatment" of Rohatyn. He also took a swipe at the Fed by calling for a national debate over policies that affect inflation and growth.

Despite the presidential pique, Administration officials said Clinton will soon reappoint Greenspan, who is widely revered on Wall Street, to a third four-year term as chairman of the Fed. A new candidate for the post of vice chairman could be harder to find.

--By John Greenwald. Reported by James Carney and Adam Zagorin/Washington

With reporting by James Carney and Adam Zagorin/Washington