Lawrence Summers won’t be Federal Reserve chairman, but for one day at least, he still is moving financial markets.
Stocks rose and the U.S. dollar fell in the wake of Mr. Summers’s decision on Sunday to quit the race to lead the Fed after current chairman Ben Bernanke’s term ends in January.
Mr. Summers, the Harvard University economist who was one of Mr. Obama’s closest advisers during the financial crisis, was widely considered to be the president’s preferred candidate to lead the Fed.
But Mr. Obama’s desire to place a friend and confidante in one of the most powerful seats in Washington ran into a surprisingly committed resistance from a group of Democratic senators whose political identities had come to be formed by their advocacy of stricter financial regulation. This proved an obstacle too high for Mr. Summers, who was an architect of looser banking rules as a high-ranking Treasury official in former president Bill Clinton’s administration.
“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration, or ultimately, the interests of the nation’s ongoing economic recovery,” Mr. Summers said in a letter to Mr. Obama that was published by various U.S. news outlets.
The market reaction suggests relief that the choosing of Mr. Bernanke’s replacement now will be a more predictable event than it would have been had the White House decided to tempt Fate by nominating the controversial Mr. Summers.
It had become clear by Friday that at least four of 12 Democratic lawmakers on the Senate Banking Committee likely would have voted against Mr. Summers, meaning the White House would have had to round up support from among the 10 Republican members. (A presidential nominee must first clear the relevant committee before he or she is put before the full senate.)
Janet Yellen, the No. 2 at the Fed, has re-emerged as the front runner. She is popular among the liberal senators that fought Mr. Summers’s bid to lead the Fed, and she is seen as one of Mr. Bernanke’s closest allies in forging the Fed’s extraordinary response to the financial crisis.
Her nomination would represent continuity, which probably is one reason investors bought stocks and sold dollars on Monday. The Fed’s policy committee has laid out a path that would leave the central bank’s bond-buying program in place through at least the first part of next year, and the benchmark interest rate near zero for even longer.
Mr. Summers’s views on the merits of quantitative easing – the policy of creating money to purchases financial assets – were unclear, as private comments surfaced over the summer that suggested he was less than enthusiastic about the Fed’s key policy innovation. So Mr. Summers represented a risk that Fed policy could be overhauled, a risk that now has been removed.
“Larry was not my first choice for Federal Reserve chair,” said Elizabeth Warren, a Democratic member of the Senate banking committee who won in Massachusetts in 2012 in part because of her vocal criticism of Wall Street’s role in the financial crisis. “I’m a big fan of Janet Yellen,” Ms. Warren added in an interview with Bloomberg Television on Monday. “I think she’s terrific. She’s got the right experience and I think she’d make a terrific Federal Reserve chair.”
Yet in the wave of reporting that has followed Mr. Summers’s decision, there is a sentiment emerging that Mr. Obama and the White House remain less than enthusiastic about Ms. Yellen. The willingness of the White House to spend precious political capital to put Mr. Summers at the Fed, despite what clearly would be a perilous nomination process, supports this view. The Wall Street Journal reported that Ms. Yellen was telling people at the gathering of central bankers in Jackson Hole, Wyo. last month that she didn’t think she was going to get the job.
An oft mentioned dark-horse candidate is Donald Kohn, the 70-year-old former vice chairman at the Fed who now is a scholar at the Brookings Institution in Washington. It’s been widely reported that Mr. Obama told a gathering of Democratic law makers earlier this year that he has talked to Mr. Kohn about the Fed.
Other names getting attention are Stanley Fischer, an American who recently stepped down as the head of Israel’s central bank who also has served in senior positions at the World Bank and the International Monetary Fund; and Roger Ferguson, head of TIAA-CREF, which manages more than $500-billion (U.S.) for retirement funds, and another former vice-chairman at the Fed.
Timothy Geithner, Mr. Obama’s former treasury secretary, reportedly has told Mr. Obama that he doesn’t want to be Fed chairman.
Ms. Yellen would be the first woman to lead the Fed, which would go some way to silencing critics who accuse Mr. Obama, somewhat unfairly, of running a boy’s club at the White House. Mr. Ferguson would be the first black Fed chairman.
Another name that has crept into speculation is Christina Romer, an expert on monetary policy at the University of California, Berkley, and a member of the “dream team” of economic advisers that Mr. Obama assembled after he was elected in 2008. Prof. Romer, who led the Council of Economic Advisers, was one of the designers of the Mr. Obama’s fiscal stimulus plan.