Fed's Kohn to step down

Federal Reserve Vice Chairman Donald Kohn, a 40-year veteran of the U.S. central bank, will step down in late June, giving President Barack Obama a freer hand to reshape the institution.

In a letter to Obama released on Monday, Kohn, who has served as the Fed's No. 2 since June 2006, said he will depart when his four-year term as vice chairman expires on June 23.

The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions, Fed Chairman Ben Bernanke said in a statement.

Kohn, 67, began his career at the Kansas City Federal Reserve Bank in 1970 and rose through the ranks to become one of the more influential vice chairmen in the central bank's history.

Before becoming a member of the Fed's board in August 2002, Kohn served as a top monetary policy adviser to then-Fed Chairman Alan Greenspan.

Communication-wise, he's second to none, said Zach Pandl, an economist at Nomura Securities in New York. In a time when the Fed has some very difficult communications tasks ahead of it, having Kohn off the committee is going to be a tangible loss.

Kohn's departure will leave three seats vacant on the normally seven-person Fed board, giving Obama broad latitude to shape the central bank at a time lawmakers are considering lessening its power after the most damaging financial crisis in generations.

Members of the Fed board, which serves as the nucleus for monetary policymaking, are nominated by the president, but subject to confirmation by the U.S. Senate.

Among possible replacements, Obama may be considering Christina Romer, a prominent economist who currently heads the White House Council of Economic Advisers.

Analysts said the president might also consider Fed Governor Daniel Tarullo as vice chairman, which would still leave Kohn's board seat empty. Tarullo, an Obama appointment, is a lawyer and expert on banking regulation who could shepherd the bank toward a greater focus on financial oversight and consumer protections.

When all the vacancies are eventually filled, Obama will have named the majority of the board.

Whoever Obama nominates could face political headwinds in the confirmation process. Many lawmakers, who have one eye on mid-term elections in November, have criticized the Fed for failing to prevent a housing bubble from building and then for bailing out Wall Street firms when crisis struck.

Bernanke encountered an unusually high degree of opposition before being confirmed to a second term as Fed chairman in January.

Kohn's replacement will play a central role in formulating and explaining to markets and the public how and when the central bank plans to roll back its unprecedented easy money policies.

The vice chairman could also be instrumental in defending the Fed's ability to oversee banks and conduct monetary policy at an arm's length from lawmakers.

(With additional reporting by Emily Flitter and Kristina Cooke in New York)

(Editing by Andrea Ricci)