Obama starts to put stamp on Fed with Tarullo

CHICAGO (Reuters) - U.S. President-elect Barack Obama on Thursday moved to put his stamp on the Federal Reserve with the choice of law professor Daniel Tarullo for a seat on the central bank's board in what could be the beginning of a wider overhaul.

The 57-year-old Tarullo, a professor at Georgetown University, has been a senior economic adviser to Obama and was former President Bill Clinton's top adviser on international economic policy.

Tarullo will take over the spot currently held by Fed Governor Randall Kroszner. Though Kroszner's term ended on January 31, he can serve until replaced. President George W. Bush had nominated Kroszner for a second term in May 2007, but the Senate never approved the nomination.

If Tarullo wins confirmation, he would serve out the rest of that 14-year term, which ends on January 31, 2022.

"Dan will bring a lifetime (of) experience to the Fed in economic policy and financial regulation," Obama said at a news conference. "I have no doubt that his knowledge, experience and independence will make him a valuable addition to the Federal Reserve at this critical time."

Tarullo has more profile as a banking regulatory expert than as a monetary economist, and some analysts noted that may reflect a feeling that current strained credit conditions require a more thorough understanding of banking than of how to handle interest-rate policy.

NEED MORE LENDING

"The central obstacle to bank hesitancy about lending has to do with their concerns about preserving capital adequacy," said a global hedge fund manager, who requested anonymity. "His work in this area is as deep and careful as any that's been done ever."

"The central challenge of the Federal Reserve is to get the credit channels open," he said.

Tarullo would join Fed Chairman Ben Bernanke as the central bank tries to ease a credit crisis and combat a deepening recession that took it into unprecedented policy territory on Tuesday as it dropped official interest rates virtually to zero.

"If confirmed by the Senate, I look forward to working with Chairman Bernanke ... in helping to steer the economy through these difficult times and in adjusting regulatory and supervisory practices so as to maintain a stable and efficient financial system," Tarullo said.

The Fed's normal seven-person Board of Governors -- the power center for U.S. monetary policy -- currently has two vacancies in addition to the seat Tarullo would fill.

This means Obama could quickly name two more nominees for the Washington-based board.

Yet another seat would open up if Fed Governor Kevin Warsh is named to head the New York Federal Reserve Bank, for which he is considered a front-runner. If that were to happen, Obama could be in the unusual position to name a majority of the Fed's board early in his term.

In addition, Obama will need to decide possibly by next fall whether to renominate Bernanke for a second four-year term as chairman. His current term ends on January 31, 2010.

There has been speculation that former Treasury Secretary Lawrence Summers may be being groomed for the Fed's top job. Obama has tapped Summers to head the White House National Economic Council, a position that could give him great sway over the direction of the new administration's policies.

EYE ON REGULATION

Tarullo has just published a book on global banking regulation that discusses the need for tightening capital standards in the wake of the implosion of markets for securitized mortgages in 2007. Analysts expect some of his ideas to be put into practice as a preventative measure for future crises.

"His selection was a bit of a surprise, but it may be the case that (Obama) regards monetary policy expertise as less important at this point than knowledge of regulation's impact because of the times that we are going through," said Sung Won Sohn, an economics professor at California State University's Channel Islands campus.

Tarullo held several senior positions in the former Clinton administration, serving first at the State Department before moving over to the White House. He was Clinton's personal representative to the Group of Seven industrial nations from 1995 onward, in charge of coordinating U.S. positions for the annual summits of leaders from the United States, Britain, Canada, France, Germany, Italy and Japan.

(Additional reporting by Glenn Somerville and Nancy Waitz in Washington and Ros Krasny in Chicago; writing by Tim Ahmann and Glenn Somerville; Editing by Jan Paschal )