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Wednesday, 8 May, 2002, 16:57 GMT 17:57 UK
Changing the guard at the Fed
Mr Greenspan has dominated Fed meetings
Mr Greenspan has dominated interest rate policy
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by Steve Schifferes
BBC News Online economics reporter

The Federal Reserve, the body which sets US interest rates, is getting two new members - one of whom could be in the running to succeed chairman Alan Greenspan.

Don Kohn .. knows Greenspan's mind better than anyone

Bruce Steinberg, Merrill Lynch
President George W Bush is expected to name Fed insider Donald Kohn and Princeton Professor Ben Bernanke to the seven-member board of governors of the Fed later on Wednesday.

Mr Greenspan, who has served as Fed chairman since 1987, is widely expected to retire in June 2004 at the age of 78 when his four-year term expires.

Economists generally welcomed the appointments, which they say will give intellectual depth to the Fed board and make it less dependent on the skill of one man.

Some also believe Mr Kohn might be in line to succeed Mr Greenspan.

The Greenspan effect

Mr Greenspan has been an extraordinarily effective chairman of the Fed, and his influence has usually dominated meetings of the Federal Open Market Committee (FOMC), which sets interest rates.

His influence was most recently seen when the Fed cut rates eleven times last year to stem off the threat of recession.

Alan Greenspan and President Bush
Charming politicians and markets alike..
He commands the confidence of financial markets and Congress, which has added to the Fed's credibility in times of economic crisis.

Mr Kohn has been a close associate of Mr Greenspan, whose job has been to prepare the briefing books for the FOMC before each interest-rate setting meeting.

He is expected to be appointed to a full 14-year term, while Professor Bernanke is likely to fill the last two years of an expiring term.

"Both choices are excellent," said Merrill Lynch chief economist Bruce Steinberg.

Ben Bernanke: leading expert on monetary policy
Ben Bernanke: leading expert on monetary policy
"Don Kohn, who has been Greenspan's right hand man for most of the chairman's tenure, will be appointed to one vacancy. He knows Greenspan's mind better than anyone," he said.

"One of the most valuable aspects of this selection is that it will provide a sense of continuity when Greenspan leaves," former Fed Board member Laurence Meyer said.

The FOMC is formally made up of the seven board members including the chairman, plus a rotating group of four presidents of the 12 regional Federal Reserve banks and the head of the New York Fed.

Inflation targeting

Professor Bernanke is a strong advocate of inflation targeting, used by the Bank of England, where the central bank aims to achieve a fixed inflation rate - something that Alan Greenspan has traditionally opposed.

Professor Bernanke is expected to argue that an explicit inflation target would give the Fed more credibility in financial markets than the current approach, when the Fed usually signals in advance whether or not it is likely to raise interest rates.

He was educated at Harvard and MIT, where he received his PhD in economics.

In addition to his work on monetary policy, Professor Bernanke is a member of the academic committee that determines when recessions begin and end.

Donald Kohn, who received a PhD in economics from Michigan, has worked for most of his career at the Fed, starting in Kansas City and joining the Fed's Washington headquarters in 1975.

He is currently director of the Fed's bureau of monetary affairs.

Both nominations need approval of the Senate.

If successful, it will mean that President Bush has appointed five of the seven Fed board members.

He previously nominated two bankers, Susan Bies and Mark Olson, and re-appointed Fed vice-chairman Roger Ferguson, who played a crucial role in keeping financial markets open during the 11 September terrorist attack on the World Trade Centre.

See also:

03 Jan 01 | Business Basics
Alan Greenspan: market mover
07 May 02 | Business
US rates left on hold
17 Apr 02 | Business
Greenspan soothes rate hike fears
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