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Fed vice chairman plans to step down in June

The Federal Reserve’s No. 2 person, a close ally of Chairman Ben S. Bernanke during the institution’s crucial response to the financial crisis, will step down as vice chairman when his term expires in June.

Donald L. Kohn’s departure, announced Monday by the Fed, could leave a third opening on the central bank’s seven-member board in Washington. Two seats are vacant now. The last time the Fed’s board was down to four members was in 1942.

That size wouldn’t limit the Fed’s ability to make decisions, but it would give President Obama the opportunity to appoint a majority of the Fed board members. Obama previously named Bernanke to a second four-year term, and the Senate confirmed him in January after a contentious hearing.

With the departure of the 67-year-old Kohn, Bernanke will lose a knowledgeable Fed veteran and close advisor at a delicate time: Monetary policymakers are trying to balance the immediate demands of supporting the nascent economic recovery with the longer-term need to prevent inflation.

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The last few years have been among the most tumultuous in decades for the Fed, as it has come under withering criticism from lawmakers and many others who blamed the central bank for failing to curb excessive risk-taking by big financial firms and then engineering bailouts for them and making other emergency moves to prop up the economy.

Analysts said they didn’t expect Kohn’s departure to have a significant effect on Fed policies or on Bernanke’s control of the monetary policymaking committee, which has exhibited some dissension over when to raise interest rates that for more than a year have been near zero.

“Kohn’s resignation doesn’t alter the forecast for the Fed to keep interest rates unchanged until late this year or early next,” analyst Ryan Sweet of Moody’s Economy.com said in a note. “The balance of power on the Fed favors the inflation doves, although rifts have become increasingly visible as the trade-off between growth and inflation is more keenly felt.”

In a statement, Bernanke said Kohn “brought his deep knowledge, experience and wisdom to bear in helping to coordinate the Federal Reserve’s response to the economic and financial crisis.”

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Bernanke said Kohn helped lead the stress tests of big banking companies and directed the Fed’s efforts to increase the transparency of the central bank, among other things.

“He will be greatly missed,” the Fed chairman said.

Kohn was appointed by President George W. Bush to the Fed board of governors in August 2002. He was sworn in for a four-year term as the Fed’s vice chairman in June 2006. He could have elected to stay on as a board member for an additional six years.

In a letter to Obama stating his intention to resign, Kohn didn’t say why he planned to do so at this time but noted that the last several years have tested the ability and dedication of the Fed to maintain financial and economic stability.

“I am confident that history will judge the Federal Reserve, under the leadership of Chairman Ben Bernanke, to have met these challenges with great speed, imagination and effectiveness,” he said in the letter dated Monday.

Lyle Gramley, a former Fed governor, said he wasn’t surprised by Kohn’s decision to retire after 40 years at the Fed.

“He can use the opportunity to regain his financial position,” said Gramley, now a senior economic advisor at the Potomac Research Group in Washington. “It’s an enormous sacrifice for someone as talented as Don Kohn to stay on as long as he has.”

The salary of the vice chairman and other Fed board members was set by law at $179,700 for this year. The chairman’s salary this year is $199,700.

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Kohn, who has a doctoral degree in economics from the University of Michigan, joined the Fed in 1970 as a financial economist at the Federal Reserve Bank of Kansas City. Since then, he has held a number of posts, including secretary of the Fed’s interest rate-setting Open Market Committee from 1987 to 2002.

don.lee@latimes.com


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