An Opening at the Fed

With the announcement today by Donald Kohn that he will leave the Federal Reserve board at the end of his term has given President Barack Obama an opportunity to shape the future monetary policy of the United States. Kohn, who was initially appointed as Vice Chairman by President Bush has been hailed as an incredibly influential member of the group which effectively determines the country's monetary policy. With this, and any other vacancies, Obama has the opportunity to nominate candidates who are sympathetic to his policy views.

This aspect is incredibly important with the Federal government following an expansionary fiscal policy driven largely by debt. The Fed has become a major purchaser of government obligations as traditional buyers lack the capacity to absorb larger quantities of Treasury Bonds. Additionally, the Federal Reserve's board is tasked with determining several very influential interest rates and dictating how much capital firms are required to hold on deposit.

Obama can, by appointing those who agree with him, shape the board to be sympathetic to the policy he and his allies in Congress carry out. He will likely look for someone who will be relatively dovish on inflation and who might hope to continue the policies of 'quantitative easing' through purchases of government debt.

Some have seen the Federal Reserve as a defacto fourth branch of the Federal government. Much like the Supreme Court, the Executive and Legislative branches have abilities to oversee the bank and nominate some of its members. Some people might even go so far as to say that the Fed is more important than some of the formal branches of government. With this retirement, President Obama has been given an additional opportunity to further influence the bank. Likely, Obama will find a nominee who will fervently support his policies through dovish monetary policy and continued support for purchasing Treasury debt.