Senior Democrats in the House of Representatives have threatened to cut the salaries of top Federal Reserve officials by as much as 50% and sharply increase the political oversight of monetary policy.

There is little chance that such ideas - many of them floating around Capitol Hill for 30 years or more - will ever become law. But it remains to be seen whether the new, young, and pliable President will spend much political capital defending the integrity of the central bank.

When the moment to start tightening comes, Fed officials will find it difficult to increase their 3% target for the federal funds rate, no matter how fast the money supply may be growing. And should money growth run out of control, it would have major consequences for the economy - particularly the risk of renewed inflation.

An End to Easy Money

But tightening is painful, and the Fed will need strong support from the White House in order to brave the threat of political retaliation.

Demand for credit in the private sector appears to have stabilized and may even be increasing. To push the federal funds rate down to 3% and keep it there, the Fed had to pump more than $100 billion into the economy - a near record rate of gain. The longer the Fed holds rates down, the more money growth will increase.

For the time being, this is fabulous news for financial markets. The supply of fresh liquidity far exceeds the needs of the real economy. These surplus funds have obviously played a key role in supporting financial-asset values for the past 12 to 18 months.

Sadly, good times, like bad, come to an end. The bigger the climb in money growth, the sharper will be its eventual fall. Meanwhile, the huge jump in spending money has kept inflationary expectations high, despite the modest rate of price change in recent months.

As a result, long-term rates are above optimum levels for the current stage of the expansion.

Gonzalez in Vanguard

Rep. Henry Gonzalez, the maverick Texas Democrat who heads the House Banking Committee, is leading the latest charge against the Fed. Many, if not most, of Rep. Gonzalez's ideas are warmed-over versions of proposals that an earlier Texas congressman and banking committee chairman, Wright Patman, failed to enact in a 50-year career of Fed-baiting.

Rep. Gonzalez said he will introduce legislation to require Senate confirmation of the presidents of-the 12 regional Federal Reserve banks. The White House would select regional presidents from a list submitted by the directors of each bank, subject to the same confirmation process as the seven members of the Fed board.

No more than a simple majority of the Fed bank presidents could be members of the party controlling the White House.

The proposal would limit salaries of employees of the Federal Reserve Board and the Federal Reserve banks to what is paid Fed Chairman Alan Greenspan - $129,500, currently. All the regional Fed presidents earned more than that in 1991, and Gerald Corrigan of the New York Fed got $245,000.

Restructuring the FOMC?

Rep. Gonzalez has a limited reputation as a stand-up comic. Even so, he claimed the bank presidents have no reason to fear his legislation. He argued that they should find Senate confirmation "to their advantage" because it would "put them in a stronger position on the Federal Committee," the body that sets monetary policy.

As an alternative, other Democrats in Congress would effectively abolish the FOMC by removing from it the reserve bank presidents, leaving only the central bank governors.

Rep. Gonzalez also wants congressional oversight of the central bank's foreign exchange operations market because its interventions are "used in certain cases to make the equivalent of loans to foreign countries."

Among other things, his bill would stiffen provisions designed to prevent conflicts of interests on the Fed bank boards, give Congress the right to review the budgets of the Federal Reserve Board and the Fed banks, require release of complete minutes of FOMC meetings instead of summaries, and extend the General Accounting Office's audit authority to all Fed operations.

Effects of Monetary Strictures

Meanwhile, the Fed is pumping high-powered money into the credit markets at an extraordinary pace. Total bank reserves, the raw material for the money supply, rose at an annual rate of 51.14% in October from their September average. The Fed cannot increase the money supply at this rate forever.

Investors should focus on what happens when the Fed shuts the faucet. The drop in money growth in 1984, for example, pushed the yield on Treasury bonds to 14%. In 1987, bonds got to 10%, and the stock market crashed.

Another stock market melt-down is unlikely.

However, investors should anticipate higher prices for gold and lower prices for bonds on Mr. Clinton's watch.

Mr. Heinemann is chief economist of Ladenburg, Thalmann & Co., investment bankers in New York.

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