Working for the People

Donald Kohn: Vice chairman, Federal Reserve Board of Governors

by Jim Toedtman ’63

Donald Kohn took time to chat with students when he was on campus in October, 2005.

The Federal Reserve Board of Governors was holding a conference call in late April 1987, weighing a preoccupation with hyperinflation against turmoil in the world’s financial markets and a sudden surge in the national economy. Late in the meeting, Federal Reserve chairman Paul Volcker, arguably the second most powerful man in the country, turned to Donald L. Kohn.

“Mr. Kohn, do you want to say anything about anything?”

Then, as now, Don Kohn ’64 was the Fed’s go-to guy. Then he was Federal Reserve secretary and staff adviser. Later he became chief economist, and today he serves as vice chairman of the Federal Reserve Board of Governors.

At the vortex of a $13.3 trillion national economy, Kohn rubs elbows with some of the wealthiest and most powerful people on earth. He was the man to whom Alan Greenspan turned for answers or advice. He understands the vagaries of global finance and the domestic housing market, and easily talks of money supply, gasoline or cement prices, or how the Maastricht Treaty affects jobs in Germany.

Don Kohn also rides his bicycle to work at least twice a week. He has eschewed the trappings and financial allure of Wall Street. Instead, for more than three decades, his career has been that of a civil servant who rose to the top of his profession and his institution. He begins each work day worried about what inflation, housing costs, and energy prices are doing to your checkbooks.

Kohn is known for his analytical skills and his curiosity—what he calls “habits of mind,” nurtured and encouraged as an economics major at Wooster. (He was recognized as a Distinguished Alumnus in 1998 and received an honorary Doctor of Laws degree at Wooster last June.)

Reflecting on his Wooster years invariably includes mention of cutting chapel for coffee and a cigarette at The Shack. But he quickly turns to what he calls “the Wooster tradition”—the discipline of Independent Study, the “new horizons” introduced by economics professors, and using his knowledge “for the common good, as well as for individual gain.”

Having opted for the common good side of that equation, Kohn’s influence resulted from his tenure as Volcker’s advisor and Alan Greenspan’s counselor. Since his 2002 appointment as governor and his 2005 promotion to vice chairman, Kohn has become a policy maker in his own right, with a direct hand in the Fed’s enormous influence on the economy.

Congress established the Federal Reserve’s central responsibility for “sustainable economic growth” in 1913 with legislation that refined the federal banking system, originally crafted by Alexander Hamilton. The Federal Reserve has assumed the objectives of keeping employment high and inflation low. It controls cash flow by supervising banks and processing checks, and it has developed a highly regarded consumer and economic research arm. But the Fed’s most significant influence flows from its control of credit conditions, the power engine of the national economy.

It may seem a bit dense, but the focus for Kohn and six other Federal Reserve governors when they meet 10 times a year is on setting a target for the overnight interest that designated banks charge major commercial banks. This federal funds rate percolates through the economy, and influences the rise and fall of interest rates for businesses, home mortgages, credit cards, and exchange rates. It is a balancing act that requires a deft hand: High rates can choke hiring and spending; low rates can ignite inflation.

Top-ranking Federal Reserve officials also have assumed a critical role in explaining the Board’s activities to the public. Public comments by Board Chairman Ben Bernanke or Kohn elicit intense scrutiny and can trigger a sharp reaction in global financial market activity.

Kohn’s frame of reference is the searing memory of the hyper-inflation of the 1970s. Oil prices had quadrupled and were followed by a double-whammy—inflation topped 14 percent and unemployment reached double-digits.

“I think the formative event in my career was living through that period and seeing there was no tradeoff between inflation and employment,” Kohn says.

Volcker’s board jacked up the target federal funds rate to 20 percent in 1980. Inflation eventually fell to 2.5 percent, but interest rate hikes helped propel a deep recession in 1981 and 1982. Caravans of truckers and farmers came to Washington, D.C., to protest. Contractors with no homes to build sent Volcker stacks of lumber.

“We had tractors circling the building to protest the high interest rates, and consumer groups telling us we were creating poverty,” Kohn recalls. “It was a very, very difficult time.”

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