Federal Reserve Vice Chairman Donald L. Kohn announced today that he will retire when his term expires in June. As the second-most powerful U.S. central banker that's pretty big news. But how significant is the move for U.S. monetary policy?
The average American -- and I'd guess most people reading this -- probably never heard of Donald Kohn. Even though he has an incredibly prominent role at the Fed, vice chairman isn't nearly as public a figure as Chairman. But it's hard to exaggerate how important a part he has played in U.S. monetary policy over the past few years. As the #2 man, his opinion matters a lot. Only Chairman Bernanke himself has had a bigger impact.
So why is Kohn retiring? Well, he's 67 and has worked for the Federal Reserve in some capacity since 1970. It's pretty easy to see that he's probably ready for a well-deserved break. And the past few years have likely been particularly stressful, for obvious reasons.
Kohn's retirement is a major development for the Obama administration. Even though his term is up in June, the administration now doesn't need to worry about reappointment: it can just begin the search for a new board member. And the President will also be appointing a new vice chair. The question is whether he'll opt to promote from within, or give the job to his new appointee.
How big a change will a new vice chairman have on monetary policy? That depends who the President picks. If he chooses an inflation hawk like current Kansas City Fed President Tom Hoenig, then that could influence swifter monetary tightening. If I had to guess though, I would say that the administration will likely focus on someone that would further its regulatory goals. I also suspect it wouldn't be someone terribly high profile like Larry Summers, who might not like answering to Bernanke. But this definitely gives the Obama administration the opportunity to have a greater voice in Fed policy, which it likely feels shorted on due to the pressure it felt to reappoint Bernanke.
If you have any thoughts on a good or likely choice for the new vice chairman, feel free to comment below!
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