Donald Kohn, Federal Reserve's Vice Chairman, Is Stepping Down, Giving Obama An Opening
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WASHINGTON — Federal Reserve Vice Chairman Donald Kohn's decision to step down at the end of June gives President Barack Obama a chance to put a bigger imprint on the central bank.
Kohn, the Fed's second-highest ranking official, has played a major role in shaping the Fed's strategy in fighting the worst financial and economic crises to hit the country since the Great Depression.
His departure will open up a third seat on the seven-member Federal Reserve board in Washington. Board members are picked by the president and must be confirmed by the Senate.
The president will have a delicate task before him. He will need to pick candidates who appeal to Democrats and aren't objectionable to Republicans. All this in an election year, where many Americans are upset with Obama about Wall Street bailouts, high unemployment and rising home foreclosures.
Earlier this year, Democrats lost their filibuster-proof Senate majority in a Massachusetts special election, highlighting the challenges they have in selling their message to voters.
Against that political backdrop, Bernanke had to wage a bruising battle in the Senate to garner enough support to secure a second, four-year term. The 70-30 Senate vote in late January was the closest ever for the post.
In selecting new Fed members, Obama "needs to stand up to this populism" and not be afraid to pick people with the right economic and financial credentials even if they had worked on Wall Street or in the banking industry, said Anil Kashyap, professor of economics and finance at the University of Chicago's Graduate School of Business.
The battle over Bernanke's confirmation was seen as a test of central bank independence, a crucial element if the Fed is to carry out unpopular but economically essential policies.
Its decisions on interest rates can have immense consequences, from the success or failure of the largest companies to the typical home-buyer's ability to get an affordable loan to the price of cereal at the grocery or gas at the corner station.
Besides tapping Bernanke – first appointed by George W. Bush – for a second term, Obama picked Daniel Tarullo, a former Georgetown law professor, to serve on the Fed. The Fed's other members – Kevin Warsh has Wall Street experience and Elizabeth Duke was a banker_ were picked by Bush. There are two vacancies on the board.
Fed watchers suggest that Tarullo could be promoted to vice chairman, but he is said to want to concentrate on his role of being the Fed's point person on overhauling the nation's financial structure. Others mentioned include Obama's top economist Christina Romer, chair of the White House's Council of Economic Advisers, CEA member Austan Goolsbee and Janet Yellen, president of the Federal Reserve Bank of San Francisco. Or Obama could opt for Republican Greg Mankiw, economics professor at Harvard.
When the Fed was battling the early days of the housing, credit and financial crises, it managed to operate with two vacant seats. Duke had to wait more than a year to be confirmed by the Senate, where Democrats were in no rush to clear her nomination.
Even if the Fed board were to have three vacancies, it wouldn't be crippled and could continue to operate. Under such a circumstance, however, the law requires that the Fed board have a unanimous vote to approve any policy decision. The administration is expected to have Kohn's replacement named before he leaves.
As has been the case with filling other openings in the Obama administration, potential candidates for the Fed openings might be discouraged by the intense scrutiny that comes with the vetting process as well as the likelihood of having to take a pay cut.
Given double-digit unemployment, there could be pressure on Obama to fill the open seats with people who are considered more "dovish," meaning they are more concerned about unemployment than they are about inflation, some analysts said.
A veteran of the Fed, Kohn first joined as an economist in Kansas City in the early 1970s. He has been a member of the Fed board since 2002, and a confidante of Bernanke as well as his predecessor, Alan Greenspan.
"He will be greatly missed," Bernanke said.
In a letter to Obama, Kohn announced his intention to step down when his term as vice chairman ends on June 23.
Created by Congress in 1913 after a series of bank panics, the Fed also acts as the lender of last resort. It provides low-cost, emergency loans to banks when they can't get money from private sources. That was the case when credit froze up during the financial crisis.
Financial stability is a key ingredient to economic stability.
"At no time since the Great Depression have this ability and dedication been tested as they have been over the past several years," Kohn, 67, wrote of the institution in his letter to the president.
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JEANNINE AVERSA 03/ 1/10 05:51 PM ET Associated Press