Kevin Warsh, the Federal Reserve's youngest-ever governor and a vocal inflation hawk skeptical of recent monetary easing efforts, said on Thursday he is stepping down from the central bank's powerful board.
The departure of Warsh, a former banker at Morgan Stanley, may further tilt the balance of views at the Fed's influential Washington-based nucleus, in favor of those who support further monetary easing if economic weakness persists.
"The stance of the board is likely to shift in a slightly more dovish direction," said Millan Mulraine, economics strategist at TD Securities.
No reason was cited for the decision and a Fed official said Warsh, 40, had no immediate career plans.
He joined the Fed in February 2006, and will have served just over five years when he leaves at the end of March. His term was not due to expire until January 31, 2018.
The U.S. central bank is at an unprecedented juncture in its history. Having cut interest rates to zero in response to the worst recession in generations, the Fed has also committed to buy a total $2.3 trillion in government and mortgage bonds.
Economists say history will judge the Fed not only for its crisis response but also its ability to withdraw the stimulus in a timely manner, a high priority for Warsh and a number of hawkish presidents of regional Fed banks.
In November, the Fed announced it was buying $600 billion in Treasuries to support a fragile recovery, a move that Warsh agreed to reluctantly. Some economists and Republican politicians say the policy sows the seeds of future inflation.
At the same time, policymakers in emerging economies have accused the United States of trying to devalue the U.S. dollar to boost exports, something the Fed flatly denies.
Despite signs of improvement in the economy, Fed Chairman Ben Bernanke has shown little inclination to cut short the bond purchases. On Wednesday, he welcomed a sharp fall in the U.S. jobless rate to 9 percent in January from 9.8 percent in November but said the job market still had a long way to go.
While an improving economy and political pressure have raised the bar for more Fed stimulus, Warsh's departure, and the expected renomination of MIT Professor Peter Diamond to the Fed board by President Barack Obama, could raise the chances of further action if the recent economic pick-up is short-lived.
Diamond's nomination has been clogged in Congress after Republicans accused the Nobel laureate of lacking experience.
Appointing Warsh's replacement could prove similarly cumbersome.
While Warsh's public appearances and speeches were infrequent, they often made a splash. In a Wall Street Journal editorial piece he expressed skepticism about the Fed's $600 billion bond-buying plan, days after its launch in November.
Another op-ed, in September 2009, spooked financial markets by suggesting the Fed's eventual exit from its extraordinary stimulus measures might be more rapid and abrupt than investors had been expecting.
A Harvard Law School graduate, Warsh is among the Fed's richest top officials. Financial disclosures released in July stated that as of 2009, his wife Jane Lauder, granddaughter of the founder of the Estee Lauder cosmetics company, had assets worth at least $66.3 million. Warsh listed assets worth between $702,000 and $1.5 million.
Warsh's appointment by former President George W. Bush was controversial at the time. Then 35, Warsh, whose background is in law rather than economics, was seen as lacking experience and being too politically connected to the Bush White House.
He emerged as an important player during the financial crisis. Fed Chairman Ben Bernanke exploited Warsh's ties to the banking sector to keep open communications between the central bank and key firms.
Along with former Fed Vice Chair Donald Kohn and Treasury Secretary Timothy Geithner, Warsh quickly became part of Bernanke's inner circle.
"Kevin rendered the Federal Reserve and the nation exemplary service during his time at the Board," Bernanke said. "In particular, his intimate knowledge of financial markets and institutions proved invaluable during the recent crisis.
"I deeply appreciate his insights and wise counsel and, most especially, his fortitude and friendship during the difficult days, nights and weekends of the crisis," Bernanke added in a statement.