An influential voice at the Fed

Donald Kohn has served on Board of Governors for 30 years and is a top strategist

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October 07, 2005|By BLOOMBERG NEWS

WASHINGTON -- No matter whom President Bush picks as a successor to Alan Greenspan in the next few months, Donald Kohn is likely to wield large influence over the way the Federal Reserve thinks about interest rates and the U.S. economy.

During his 30 years at the Board of Governors, Kohn, 62, has attended more policy meetings than any current Fed member. He served as Greenspan's top strategist for 15 years before Bush promoted him to governor in 2002. He embraces much of Greenspan's thinking on financial markets, risk and interest-rate policy.

"After the chairman, at least in my opinion, Don has had a greater impact on the Fed's monetary policy process than any other single person," said Robert Parry, former San Francisco Fed Bank president. "He was very close to the chairman, and they discussed issues frequently. He and this chairman were really a team."

Kohn shows up as a long-odds candidate to replace Greenspan in surveys and on betting sites, well behind leader Ben S. Bernanke, a former Fed governor and now chairman of the Council of Economic Advisers. One drawback: Kohn has few visible alliances on Capitol Hill, analysts say. Kohn says he has no party affiliation and declined to be interviewed for this article, according to a Federal Reserve spokesman.

"His apolitical profile does hurt him," said Ken Kim, an analyst at Stone & McCarthy Research Associates, a Skillman, N.J., economics firm whose survey places Kohn fourth on a list of contenders. Still, "Kohn's chances could be better than the market currently realizes."

"If you talk to the Fed staff in private and ask them who would Greenspan like to replace him, the answer would be Don Kohn," said Roger Kubarych, economic adviser to HVB America Inc. and a former deputy director of research at the New York Fed. A Fed spokeswoman declined to comment.

The 79-year-old Greenspan's nonrenewable term as a governor expires in January. With two other vacancies for Fed governors, Bush's appointments might change the board's style and approach. Kohn's influence as a reference point on policy during Greenspan's 18-year term is likely to be welcomed by the Fed's staff of 230 Ph.D.'s and investors alike.

"The staff and Don Kohn together are important sources of continuity," said Laurence Meyer, a Fed governor from 1996 to 2002. Without Greenspan, "Kohn becomes more important."

Kohn earned a doctorate in economics at the University of Michigan and went to work for the Kansas City Fed in 1970, then moved to Washington to start with the board in 1975.

Under Greenspan, Kohn helped scrap policies that kept financial markets guessing about where the Fed wanted interest rates to go.

After a presentation by Kohn in December 1987, Greenspan urged reluctant policymakers to assign a numerical target to the federal funds rate, the interest charged for overnight loans between banks. Eventually, that figure became the most important signal of Fed policy. The Fed now declares its numerical target in a statement every six weeks - currently 3.75 percent after 11 straight increases.

"Don stepped into a world where monetary operations were broken," said Peter Fisher, the former executive vice president at the New York Fed and now managing director at fund manager Black Rock Inc. in New York. He "played a key staff role in redesigning monetary operations for our more open capital markets."

Greenspan named Kohn director of the new Division of Monetary Affairs in 1987 and for the next 14 years Kohn and his team wrote the "Blue Book," a confidential strategy document prepared for every meeting of the Fed's Open Market Committee that outlines scenarios for changes in interest rates. "It was the Greenspan-Kohn monetary policy, and the dash is perfectly legitimate," Kubarych said.

"There is a way they come to a conclusion, and it is your job to not constantly be picking fights with it," said James Glassman, senior economist at JPMorgan Securities in New York and a former Fed economist and colleague of Kohn's. "Don grew up in that culture, and in turn, helped to shape it."

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