Fed governors sworn in

WASHINGTON, Aug. 5 (UPI) -- Economics experts Donald L. Kohn and Ben S. Bernanke took the oath of office Monday to join the Board of Governors of the Federal Reserve System.

The oath was administered by Fed Chairman Alan Greenspan.

Kohn and Bernanke were confirmed by the Senate last week, after their mid-spring nomination by President George W. Bush.

"Both of these nominees are highly respected economists who, based on their records, appear to be exceptionally well qualified to serve as members of the Federal Reserve's Board of Governors," said Banking Committee Chairman Paul Sarbanes, D-Md., during last week's nomination hearing.

Jon Corzine, D-N.J., who was chairman of investment bank Goldman Sachs before he became a senator, also praised the nominees, particularly Kohn, who the senator has worked with before.

"I worked with Dr. Kohn for nearly 20 years ... and we are lucky to have him," Corzine said. "And he definitely speaks his mind."

Headed by Greenspan, the Fed's longtime chair, the Board of Governors accounts for seven of the 12-member Federal Open Market Committee.

The five others consist of the President of the Federal Reserve Bank of New York, and four of the 11 other heads of the 12 regional Federal Reserve Banks across the nation.

While the four regional Fed presidents rotate as committee members on an annual basis, the New York Fed president is always allotted a place on the FOMC, given New York's importance in the financial world.

Meanwhile, the chairman and vice chairman are nominated by the White House and approved by the Senate for four-year terms. The five governors, however, are appointed for 14-year terms, under the expectation that such long-term appointments will allow them to ponder over monetary policy beyond short-term gains, political or otherwise.

Greenspan's fourth term as Fed chairman will expire in June 2004, which will allow Bush to nominate the next leader of the most powerful central bank in the world as well.

Unlike Bernanke, who heads Princeton University's Economics Department and has largely spent his career in academia, Kohn has been a staff member of the Fed for the past 35 years, 15 of which have been spent as Greenspan's right-hand man.

It is highly unusual for a staff member of the central bank to reach the top spot, and some senators expressed their concern that Kohn's strong ties with Greenspan would make him more of a yes-man and a bureaucrat rather than an independent thinker.

Kohn, however, reassured the banking committee members that he would first and foremost abide by the Fed's own goals of "maximum employment, stable prices, and moderate long-term interest rates."

Bernanke gave specific suggestions on what he would propose once he became governor.

Specifically, the Princeton professor called for inflation targeting of "about 1 to 2 percent in positive inflation," adding that the current rates were at a "healthy level ... to encourage maximum growth."

Bernanke also noted the danger of having no inflation, citing the case of Japan and the deflationary spiral it now finds itself in vs. the lack of a healthy level of inflationary pressure.

"The Bank of Japan has made very poor decisions ... in trying to avoid deflation," Bernanke said, adding that he himself had advised the Japanese government a number of times to adopt inflation targeting.

Both Bernanke and Kohn were upbeat on the U.S. economy's outlook, although both were quick to point out that some near-term risks remained, particularly in the financial markets.

Bush's earlier Fed governor appointees are Susan Bies, formerly executive vice president for risk management at First Tennessee National Corp. and Mark Olson, who was staff director of the securities subcommittee of the Senate banking committee.