After nearly three years at the Fed, Kroszner said he will step down on January 21, a week before the central bank's next regularly scheduled meeting. Kroszner, 46, will return to academia as a professor at the University of Chicago's Booth School of Business.

He continued to serve at the Fed - during a time of great economic and financial upheaval - even though his term expired last year.

Led by Chairman Ben Bernanke, the Fed has been on the front lines of government efforts to battle the worst credit and financial crises to hit the country since the 1930s.

Radical moves

Despite a flurry of radical moves and the Fed's decision last month to ratchet down a key interest rate to an all-time low, the central bank has said it expects the economy to stay stuck in a painful rut for some time.

The recession, which just entered its second year, is already the longest in a quarter-century.

Obama, who takes over on January 20, has selected Daniel Tarullo, a Georgetown Law professor, to fill one of two already vacant seats on the Fed's seven-member board in Washington. Tarullo is expected to win approval from the Democratic-controlled Senate. With Kroszner's departure, there will be another opening on the Fed for Obama to fill.

Bernanke and the rest of the Fed's board members were hand-picked by President George W. Bush. Given that Bernanke's term expires in early February of next year, Obama will have to decide whether to keep him or nominate a replacement. When asked recently what he'll do, Obama said it was too early to be talking about such things.

The Senate Banking Committee will hold a hearing Thursday on the selection of Tarullo as well as other Obama picks for economic positions.

At the Fed, Kroszner was the point person on efforts to tighten regulations on home mortgages and credit cards.

New regulations

"He ably oversaw the completion of significant new regulations protecting mortgage borrowers and credit-card customers," Bernanke said in a statement. "We will miss the keen insight, and good humour that he brought to our deliberations."

Looking back on his tenure, Kroszner said: "The challenges and issues we have confronted have been unprecedented."

- AP