By Arshad Mohammed
WASHINGTON (Reuters) - President Bush (news - web sites) will announce his decision to nominate monetary economists Ben Bernanke of Princeton University and Donald Kohn of the Federal Reserve (news - web sites) staff to the U.S. central bank's board on Wednesday, a Bush administration official said on Tuesday.
Analysts said Bernanke, who is one of the world's leading academic authorities on monetary policy, and Kohn, a key lieutenant to Fed Chairman Alan Greenspan (news - web sites), would strengthen the board by adding first-rate economists with the expertise to debate the finer points of monetary policy with Greenspan.
If confirmed by the U.S. Senate, the economists could fill a gap left by Laurence Meyer, a prize-winning forecaster whose term on the board expired in January, and provide continuity should Greenspan choose to step down when his current four-year term as chairman ends in June 2004, when he will be 78.
The administration official, who asked not to be named, said Bush planned to nominate Kohn to a full 14-year term on the board and Bernanke to serve out the just under two years remaining on former Fed Governor Edward Kelley's term.
The official said that Bush would announce his intention to nominate the two men in a written statement, adding that the formal nominations could take weeks or months to be sent to the Senate given the extensive paperwork involved.
Last week, sources said Bush was expected to name Kohn, who is adviser to the Fed board for monetary policy, and Bernanke, who chairs the Princeton economics department, and one source said the nominations could come this week.
A Fed spokesman directed inquiries on the nominations to the White House, which declined comment.
Bernanke, 48, is a Republican who like Greenspan has a strong free-market bent on economics but disagrees with the Fed chairman on inflation targeting, which he favors as a tool for monetary policy. Despite this stance. Bernanke's monetary views are expected to be well within the central bank's mainstream.
Kohn, 59, the most senior Fed staff member on monetary policy issues, also holds the title of board secretary and is widely seen as one of Greenspan's most trusted advisers.
In one sign of his influence, Kohn presents members of the interest-rate setting Federal Open Market Committee (news - web sites) with the "Blue Book," a document outlining the pros and cons of different interest rate moves.
'SPECTACULAR'
The selection of Kohn and Bernanke won high praise from former Fed board members as well as private economists, who hailed their top-notch credentials.
Meyer, now a scholar at the Center for Strategic and International Studies, described the choices as "spectacular."
"One of the most valuable aspects of this selection is that it will provide a sense of continuity when Greenspan leaves," Meyer told Reuters. "Don Kohn would be at the top of my list."
With the new selections, Bush has picked four people to serve on the seven-member Fed board, which forms the core of the FOMC, which sets U.S. interest rates and thus wields huge influence over the U.S. economy and world financial markets.
The FOMC met on Tuesday and left U.S. interest rates unchanged at their current, 40-year low, seeking to keep an uneven U.S. economic recovery rolling along.
Two seats on the Fed board are now open. One is a new, 14-year term left vacant in January, when Meyer departed at the end of his term. The other is an unexpired term that was previously held by Kelley, which expires on Jan. 31, 2004.
"The board strongly needs this kind of economic competence," Ken Guenther, president of the Independent Community Bankers of America, said of Kohn, who is now adviser to the board for monetary policy.
Guenther, a former fed staffer who has known Kohn for 20 years, added, "He's a force for stability and continued confidence in the conduct of monetary policy."
Senate Banking Committee Chairman Paul Sarbanes, a Maryland Democrat who would chair the confirmation hearings on the two men, reacted cautiously. "We will take a look at them. I don't know either of them," Sarbanes said. "We want nominees who are highly competent, who have manifest integrity and appreciate the complexity of the economy."
Sen. Phil Gramm of Texas, the top Republican on the Banking Committee, said he also did not know the nominees but was unaware of any "possible red flags" against them.
INFLATION TARGETING
Bernanke and Greenspan may not see eye-to-eye on inflation targeting, a strategy used by some foreign central banks to guide decisions about whether to raise or lower interest rates.
Bernanke, who has co-authored a book and several articles on the subject, favors inflation targeting as a way to improve central bank transparency. Greenspan has cited problems in accurately measuring the inflation rate.
Bernanke did his undergraduate work at Harvard and got his PhD from Massachusetts Institute of Technology (news - web sites) while Kohn studied economics at the College of Wooster in Ohio and received his PhD from the University of Michigan.
Bernanke, who is married with two children, grew up South Carolina. Kohn, married with two grown children, is from Cheltenham Township, a suburb of Philadelphia. He does not have a party affiliation.