Kohn, the Fed's second-highest ranking official, has played a major role in shaping the Fed's strategy in fighting the worst financial and economic crises to hit the country since the Great Depression.
His departure will open up a third seat on the seven-member Federal Reserve board in Washington. Board members are picked by the president and must be confirmed by the Senate.
The president will have a delicate task before him. He will need to pick candidates who appeal to Democrats and aren't objectionable to Republicans. All this in an election year, where many Americans are upset with Obama about Wall Street bailouts, high unemployment and rising home foreclosures.
Earlier this year, Democrats lost their filibuster-proof Senate majority in a Massachusetts special election, highlighting the challenges they have in connecting and selling their message to voters.
Against that political backdrop, Fed chairman Ben Bernanke had to wage a bruising battle in the Senate to garner enough support to secure a second, four-year term. The 70-30 Senate vote in late January was the closest ever for the post.
In selecting new Fed members, Obama "needs to stand up to this populism" and not be afraid to pick people with the right economic and financial credentials even if they had worked on Wall Street or in the banking industry, said Anil Kashyap, professor of economics and finance at the University of Chicago's Graduate School of Business.
The battle over Bernanke's confirmation was seen as a test of central bank independence, a crucial element if the Fed is to carry out unpopular but economically essential policies.
Its decisions on interest rates can have immense consequences, from the success or failure of the largest companies to the typical homebuyer's ability to get an affordable loan to the price of cereal at the grocery or gas at the corner station.
Besides tapping Bernanke -- first appointed by George W. Bush -- for a second term, Obama picked Daniel Tarullo, a former Georgetown law professor, to serve on the Fed. The Fed's other members -- Kevin Warsh has Wall Street experience and Elizabeth Duke was a banker-- were picked by Bush. There are two vacancies on the board.
Fed watchers suggest that Tarullo could be promoted to vice chairman. Others mentioned Obama's top economist Christina Romer, chair of the White House's Council of Economic Advisers, or Janet Yellen, president of the Federal Reserve Bank of San Fransciso.
A veteran of the Fed, Kohn first joined as an economist in Kansas City in the early 1970s. He been a member of the Fed board since 2002, and a confidante of Bernanke as well as his predecessor, Alan Greenspan.
"He will be greatly missed," Bernanke said.
In a letter to Obama, Kohn announced his intention to step down when his term as vice chairman ends on June 23.
Created by Congress in 1913 after a series of bank panics, the Fed also acts as the lender of last resort. It provides low-cost, emergency loans to banks when they can't get money from private sources. That was the case when credit froze up during the financial crisis.
Financial stability is a key ingredient to economic stability.
"At no time since the Great Depression have this ability and dedication been tested as they have been over the past several years," Kohn, 67, wrote in his letter to the president.