Board openings give Obama a rare chance to remake the Federal Reserve

FILE - In this March 5, 2009 file photo, Donald Kohn , vice chairman of the Board of Governors at the Federal Reserve, testifies on Capitol Hill in Washington. Kohn, the second-highest ranking official at the Federal Reserve, said Monday, March 1, 2010, he will step down when his term ends in late June.(AP Photo/Susan Walsh, File)
FILE - In this March 5, 2009 file photo, Donald Kohn , vice chairman of the Board of Governors at the Federal Reserve, testifies on Capitol Hill in Washington. Kohn, the second-highest ranking official at the Federal Reserve, said Monday, March 1, 2010, he will step down when his term ends in late June.(AP Photo/Susan Walsh, File) (Susan Walsh - AP)

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By Neil Irwin
Washington Post Staff Writer
Tuesday, March 2, 2010

The No. 2 official on the Federal Reserve Board said Monday that he will retire, opening a third seat on what may be the world's most powerful economic body and giving President Obama a historic opportunity to reshape the central bank.

Fed Vice Chairman Donald L. Kohn announced his plans to step down in June as one of seven Fed governors who help to set U.S. monetary policy and oversee financial-system regulation. Two others already have been appointed by Obama, meaning that soon, five seats -- including the chairman's -- will have been filled by him.

The changes come at a time of epic transformation in, and intense scrutiny of, the Fed's mission. During the past two years, the Fed has taken extraordinary actions to contain a financial crisis and prop up the economy. Now the institution must decide how and when to wind down some of those emergency measures.

The Fed's governors will also be involved in reshaping the central bank's regulatory approach to try to prevent future crises. And they will work to fend off congressional attempts to enact greater oversight of monetary policy and yank away the Fed's power to supervise banks.

"It is a pivotal point in the history of the Fed," said Diane Swonk, chief economist at Mesirow Financial. "You need somebody who has credibility and can defend the Fed's independence in a way that doesn't offend Congress. They need finesse on regulatory policy. There will be a lot on their plate."

The White House has taken preliminary steps to draw up lists of candidates for the Fed jobs, but no appointments are imminent, said sources who have been in contact with the administration. Fed watchers name Council of Economic Advisers Chairman Christina Romer and San Francisco Fed President Janet Yellen as potential candidates for vice chairman.

For the three openings, sources said, the president is seeking one or two strong macroeconomists -- people well qualified to judge how the economy is evolving and how and when to make monetary policy less supportive of growth -- and one person with a strong financial-markets background. The financial crisis showed how breakdowns in obscure corners of the financial world can endanger the broader economy, and the administration wants someone attuned to those risks.

Obama's picks to the Fed so far have been governor Daniel K. Tarullo, a banking law expert who advised his campaign, and Ben S. Bernanke, reappointed as chairman. Both have led efforts to make the Fed's bank oversight more effective and focused on broad risks to the economy that arise out of banks' decisions. Bernanke has said he wants to keep interest rates low for an "extended period" and to move cautiously in removing Fed supports for the economy.

Kohn, 67, has been a crucial figure in the Fed's response to the financial crisis and recession in the past two years. A 40-year veteran of the central bank, he was a close collaborator with Bernanke in a series of dramatic actions that helped stabilize the economy and have transformed the role of the Fed.

In particular, he took the lead last year overseeing the stress tests of major banks that helped restore confidence in the banking system and has led internal efforts at the Fed to release more details about its operations. He was a chief aide to then-Chairman Alan Greenspan, serving as director of the Fed's division of monetary affairs from 1987 to 2001, before President George W. Bush named him a governor and then vice chairman.

With Kohn's departure, Bernanke will be losing a vast amount of institutional memory and a colleague who commands respect across the Fed system.

"The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service," Bernanke said in a statement.


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