President Barack Obama plans to nominate San Francisco Federal Reserve Bank President Janet Yellen, a respected policy dove, to be vice chairman of the central bank, a source familiar with the process said on Thursday.

Yellen would replace Donald Kohn, a 40-year veteran of the Fed who announced earlier this month that he would retire on June 23. The nomination for the four-year term as the Fed's No. 2 would be subject to Senate approval.

She is considered one of the most dovish members of the central bank's policymakers, meaning she is seen to lean toward policies that will boost growth and promote employment rather than those aimed at keeping inflation at bay.

Yellen, reached by telephone, declined to comment, as did the Treasury Department. The White House did not respond to requests for comment.

The FOMC top brass is starting to look like the dream team, said Chris Rupkey of the Bank of Tokyo-Mitsubishi, referring to the Fed's interest rate-setting panel.

As bad as it looked to lose Fed Vice Chairman Kohn with his decades of experience, the FOMC is going to pick up where it left off with the experience and quiet wisdom, he said.

If nominated and confirmed, Yellen would help steer the Fed out of an unprecedented level of monetary stimulus and defend the Fed's regulatory capabilities before a skeptical Congress that faults the central bank for lapses that contributed to the financial crisis.

STATE BANK REGULATOR EYED

Kohn's impending departure means that Obama has three seats to fill on the seven-member board of the central bank. The source said top candidates had been identified for each of the three spots, but all selections, including Yellen's, are subject to completion of a vetting process.

The source said the administration also was vetting a number of other candidates in case any of its top picks fell through.

One of the people under consideration to fill a board seat is Sarah Bloom Raskin, the top banking regulator for the state of Maryland, a different source familiar with the process said.

The administration's decision to narrow its search to include Yellen and Raskin was first reported by Bloomberg.

Yellen was chairwoman of the White House Council of Economic Advisers under President Bill Clinton between 1997 and 1999 and a Fed governor between 1994 and 1997.

A top-flight economist, she has warned of undesirably low inflation and the prospect of a prolonged, sluggish recovery for the U.S. economy.

Even with my moderate growth forecast, the economy will be operating well below its potential for several years, Yellen said on February 22. If it were possible to take interest rates into negative territory I would be voting for that.

Yellen's experience as a regional Fed president positions her well to bridge divides among the system's 12 banks around the country and the board in Washington.

Policymakers are currently split among those who think persistently high unemployment calls for a prolonged period of easy money and those who worry that Fed's massive cash infusion into the financial system poses a dangerous inflation risk if the Fed does not soon begin to pull back reserves.

CONSENSUS-BUILDING ROLE?

To forge consensus, Yellen will have to set aside some of her most growth and employment friendly inclinations.

Given the fact Yellen is seen as most dovish among FOMC members, the market is likely to think that the Fed may take more time until it decides to raise interest rates, said Yoshio Takahashi, a fixed-income strategist at Barclays Capital in Tokyo.

However, she may step into the consensus building role expected of the vice chair, Takahashi said.

Obama's choice of Raskin shows an eagerness to burnish the Fed's credibility as a regulator.

Currently Maryland's commissioner of banking regulation, Raskin is a lawyer who previously worked at Promontory Financial Group, the Senate Banking Committee, and the New York Fed.

In testimony before the panel overseeing the government's bank bailout last year, Raskin called for stronger consumer focus from regulators and backed breaking up banks that have become too large.

The current crisis is the result of well over a decade's worth of policies that promoted consolidation, uniformity, preemption and the needs of the global marketplace over those of the individual consumer, she said in January 2009.

Among other names cited as possible candidates for the third vacancy are Massachusetts Institute of Technology economist Peter Diamond, Harvard economists Jeremy Stein and David Scharfstein, and Johns Hopkins University economist Laurence Ball.

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