Fed's No. 2 to depart

Federal Reserve Board Vice Chairman Donald Kohn listens during a presentation in Atlanta, January 3, 2010.

WASHINGTON (Reuters) - 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 more scope 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.

Kohn's departure gives Obama the opportunity to fill a top slot at the U.S. central bank in addition to two long-vacant governor positions, at a time when the central bank faces two big challenges: communicating how it will exit from its extraordinary easy money policies and defending its role in overseeing banks.

"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."

Obama's selections could influence how quickly the Fed raises interest rates and how aggressively it takes on its post-crisis regulatory responsibilities.

Kohn's announcement comes just over a month after the U.S. Senate approved Ben Bernanke to a second term as Fed chairman after a series of contentious hearings. His decision to step down was "his own," an administration official said.

The White House said Obama would move quickly to name a vice chairman to ensure a successor can win the needed Senate backing by the end of Kohn's term.

"He'll seek to nominate somebody quickly and hopes that they can be quickly confirmed," White House spokesman Robert Gibbs said.

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 2002, he served as a top adviser to then-Fed chief Alan Greenspan.

Many observers had expected him to step down when his vice chairmanship expired.

Among possible replacements, Obama could turn to Christina Romer, the head of the White House Council of Economic Advisers.

He might also consider elevating Fed Governor Daniel Tarullo, which would still leave a board seat empty and to be filled. An Obama appointee, the former Clinton administration official is a lawyer and regulatory expert who has been playing a big role in revamping the Fed's approach to bank regulation.

Tarullo, however, is said to prefer to focus on supervision responsibilities at the Fed.

San Francisco Federal Reserve Bank President Janet Yellen, a former Fed board member and chair of the White House Council of Economic Advisers, is also seen as a leading candidate.

"What is important here is who the new appointees are, what their specialization is, how exceptional they are," said former Fed Governor Laurence Meyer. "We are very short now on, specifically, people who come from a background of macroeconomics and forecasting."

OBAMA'S STAMP

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.

When all the vacancies are eventually filled, Obama will have named the majority of the board at an unusually early stage in his presidency. While the chairman and vice chairman serve four-year terms, they also serve concurrent 14-year terms as members of the Fed's Board of Governors.

Kohn's board term was not scheduled to expire until 2016.

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.

That ire had threatened to scuttle Bernanke's bid for a second term as Fed chief. He ended up winning confirmation in January by the slimmest margin in the nearly 32 years the U.S. Senate has been voting on the position.

"This is an extremely contentious environment, so I think anybody he's going to nominate certainly one would expect to skew toward the more dovish side, more emphasis on the employment situation," said former Fed economist Julia Coronado, now with BNP Paribas.

(With additional reporting by Patricia Zengerle and Emily Flitter and Kristina Cooke in New York; Editing by Andrea Ricci, Leslie Adler and Diane Craft)