Yellen leads picks for Fed seat

Federal Reserve Bank of San Francisco President Janet Yellen arrives at the Jackson Hole Economic Symposium in Jackson Hole, Wyoming August 21, 2009.

WASHINGTON (Reuters) - San Francisco Federal Reserve Bank President Janet Yellen, a monetary policy dove, tops President Barack Obama's list to be No. 2 at U.S. central bank, the White House said on Friday.

Sarah Raskin, commissioner of financial regulation for the state of Maryland, and Peter Diamond, an economics professor at MIT, are under strong consideration to fill other vacancies at the Fed, White House spokesman Robert Gibbs told reporters.

Yellen is widely respected within the Fed system and academia, although her reputation a "dove," giving weight to growth and employment, has caused some concern in financial markets. News of her potential nomination weighed on the dollar.

The Fed's mandate is to keep inflation low and stable while ensuring low unemployment, and policymakers regularly debate which portion of the mandate deserves greater emphasis at any given phase of the business cycle.

"It's a great choice," said former Fed Vice Chairman Alan Blinder, an economics professor at Princeton University. Fed Chairman Ben "Bernanke needs someone with intellectual heft on economics, and she provides that."

The potential choices of Raskin and Diamond, who has focused extensively on the future of the government-backed Social Security retirement system, reflect a desire to bolster the Fed's regulatory credibility and address growing alarm about the unsustainable U.S. fiscal position.

Diamond's "an extraordinarily talented economist," said Alice Rivlin, another former Fed No. 2, speaking of Diamond. "He hasn't been a monetary person particularly but he's a very good macroeconomist and very smart."

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

Some analysts saw all three of the potential choices as likely to tilt the Fed toward the dovish side at a time of 9.7 percent unemployment.

Public dissatisfaction with the economy's performance has put the majority that Obama's Democratic Party enjoys in the House of Representatives and Senate at risk in congressional elections in November.

"All of these people ... would be very sympathetic to Obama economic policies. I don't see anything in this group of people that says they're concerned about inflation," said Robert Eisenbeis, former director of research at the Atlanta Federal Reserve Bank.

Yellen would replace Donald Kohn, a 40-year veteran of the Fed who announced earlier this month that he would retire on June 23. Gibbs repeated on Friday that Obama intended to nominate someone to be vice chairman in time to get them through the Senate confirmation process by the time Kohn retires.

Gibbs said there were other names in the Fed selection process in addition to Yellen, Raskin and Diamond.

A source familiar with the process had said that while top candidates had been identified for each spot, the administration was vetting other candidates in case any of its preferred picks fell through.

Yellen would serve a four-year term as vice chairman concurrent with a separate term as a member of the Fed's board. Fed board terms are for 14 years. The board terms that need to be filled would expire in 2014, 2016 and 2024.

(Additional reporting by Matt Spetalnick in Washington and Ann Saphir in Boca Raton, Florida; Editing by Neil Stempleman)