Fed Vice Chairman Kohn to leave in June; gives Obama opening
By Neil Irwin
Washington Post Staff Writer
Monday, March 1, 2010; 1:05 PM
The No. 2 official at the Federal Reserve announced he will step down in June, creating a key vacancy at the central bank and setting the stage for President Obama to reshape the leadership of the Fed.
Fed Vice Chairman Donald L. Kohn will retire June 23, according to a letter he submitted to Obama on Monday morning. His term as vice chairman ends that day, though Kohn, 67, could have elected to remain at the Fed as a governor through 2016.
The president’s authority to appoint senior officials at the Fed is one of the executive branch’s most important powers when it comes to economic policymaking. Obama now has three vacancies to fill: Two of seven Fed governor positions are also open, as they have been since before he took office.
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 White House. The president is seeking one or two strong macroeconomists, these sources said, and one person with a strong financial markets background.
Once the positions are filled, Obama will have appointed five of seven governors. (He named Ben S. Bernanke to a second term as chairman in August, and appointed Governor Daniel Tarullo, a banking expert, upon taking office).
Newly appointed governors probably would have even more power to influence economic policy than usual. When the Fed eventually scales back the measures it imposed during the financial crisis, the central bank’s leaders intend to use an unconventional tool, raising the interest rate paid on bank reserves, to pull money out of the economy. Decisions on that interest rate are made by the Board of Governors, not the Federal Open Market Committee, a bigger group that includes presidents of regional Fed banks and makes most monetary policy decisions.
“The stakes are now higher for new governors,” said Vincent Reinhart, a former senior Fed staffer who is now a resident scholar at the American Enterprise Institute.
For now, Fed officials are generally unified behind an ultra-low interest rate policy to try to support the economy. But as the economy improves, some officials, especially presidents of regional Fed banks, are likely to be more eager than Bernanke to raise interest rates and drain the money supply, even at the risk of slowing the recovery. There are already early signs of division. At the last Fed policymaking meeting, Kansas City Fed President Thomas Hoenig issued a dissent from the committee’s decision to leave rates low for an “extended period.”
Fed watchers generally expect the president to favor appointees who would be in line with Bernanke’s thinking or perhaps even more tilted toward worrying about unemployment (as opposed to inflation) than him.
“I have a hard time seeing hawkish board members being appointed for two reasons,” said Michael Feroli, a senior economist at J.P. Morgan Chase. “One, board members tend to go along with the chairman, and the chairman right now happens to be pretty growth friendly. And second I can’t see the administration given the current economic environment wanting to put in a Hoenig type.”
Indeed, some liberal economists have argued that the president should move quickly to appoint new Fed governors who would be inclined to leave rates low for longer, to try to get growth going again, even if it comes at the cost of mild inflation.
Kohn 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 worked closely with Bernanke to stabilize the economy following the financial crisis.
In particular, he took the lead in overseeing the stress tests of major banks last year that helped restore confidence in the banking system; he has also led internal efforts at the Fed to release more details about its operations. He was a chief aide to then-Fed 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 his departure, Bernanke will lose a colleague who commands significant 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. “Most recently, he brought his deep knowledge, experience, and wisdom to bear in helping to coordinate the Federal Reserve’s response to the economic and financial crisis.”
“On a personal note,” Bernanke added, “I would like to express my deep appreciation for Don’s friendship and counsel during some very difficult times.”