WASHINGTON Former Treasury Secretary Lawrence Summers withdrew on Sunday from consideration to succeed Federal Reserve Chairman Ben Bernanke after fierce opposition from within the Democratic Party hurt his chances of being confirmed in Congress.
Summers, a former top aide to President Barack Obama and widely regarded as a brilliant economist and a shrewd and decisive policy maker, was considered to be the front-runner for the position to replace Bernanke, whose second term expires in January.
But Summers was dogged by controversies including his support for deregulation in the 1990s when he ran the Treasury Department in the Clinton administration - blamed by some for the financial crisis of 2007-2009 - as well as for comments he made about women's aptitude while president of Harvard.
"It became obvious he did not have support from some in his own party and had too much baggage to get approved for a number of reasons," said Richard Daskin, chief investment officer at RSD Advisors in New York.
Summers' withdrawal appeared to open the door for the nomination of Fed Vice Chair Janet Yellen, who was seen as his chief rival for the position. Yellen, who has a long career in the Fed system and also chaired the White House Council of Economic Advisers under former president Bill Clinton, would be the first woman to lead the U.S. central bank.
Still, the president has said he is also considering others, and has mentioned former Vice Chairman Donald Kohn, who retired in 2010 after 40 years at the Fed. Roger Ferguson, who was vice chairman from 1999-2006 and is currently chief executive of the academic retirement fund TIAA-CREF is also considered a possibility.
Former Treasury Secretary Timothy Geithner, while popular at the White House made clear on Sunday he has not wavered from his oft-expressed disinterest in the job.
Summers' withdrawal in a letter to Obama in which he said any confirmation process would likely be acrimonious and a distraction came after weeks of intense political pressure for the administration.
The president sought congressional approval for a military strike against Syria for a suspected poison gas attack against rebels, only to meet resistance from within his own Democratic ranks as well as from Republican lawmakers. He averted the possibility of a humiliating defeat in Congress by embracing a Russian proposal for destroying Syria's arsenal of chemical weapons.
Looking ahead, is the approaching battle between the administration and Republicans in Congress over government funding and an extension of the U.S. debt ceiling, without which the federal government could shut down in two weeks and the nation could default on its debt. Obama also must defend his signature healthcare reform against attempts to cut its funding.
It was not clear if Summers was persuaded by Obama to withdraw because of growing fears that nominating him as Fed Chairman would lead to an ugly battle within the president's own party, or whether Summers decided himself that he did not want to go through such a potentially damaging process.
"Maybe it was a recognition that he wasn't going to get through the confirmation process, and Obama certainly doesn't seem to have a whole lot of political capital right now," said Scott Frew, Managing Partner and Owner, Rockingham Capital Advisors in Hartford, Connecticut.
Word that the president was leaning toward nominating Summers over Yellen elicited an unprecedented backlash against a potential nominee to run the U.S. central bank.
Summers said that the storm pointed to a difficult confirmation process that could hurt the president's economic agenda and the institution, and decided to pull back.
"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," he wrote in his letter to Obama.
Liberal lawmakers and progressive groups had been outspoken in their opposition to Summers and were pleased the economist had taken himself out of the running.
"Larry Summers' past decisions to deregulate Wall Street and do the bidding of corporate America has made the lives of millions of Americans more acrimonious. He would have been an awful Fed Chair," said Adam Green co-founder of Progressive Change Campaign Committee, a political advocacy group.
Four Democratic senators on the Senate Banking Committee were expected to vote against him if he was nominated by the president. The most recent statement of opposition came from Montana Senator Jon Tester on Friday.
"The administration realized that the math wasn't there for a Summers nomination," a Democratic aide on the Senate banking committee said. "Withdrawing was the right choice."
Twenty Senate Democrats had signed a letter urging Obama to nominate Yellen.
Investors took the withdrawal of Summers as a green light for risk and lower interest rates, with initial market reactions signalling a view that the bank's next chief was more likely than Summers to extend an era of easy money that has flooded global markets with cash.
In futures trading ahead of the opening of the U.S. trading week, stock index futures tracking the Standard & Poor's 500 index rose more than 1 percent and futures tracking the U.S. 10-year Treasury note also rose, implying benchmark bond yields would move lower to start the week.
The dollar also weakened on expectations that U.S. interest rates were less likely to rise as rapidly as they had over much of the summer.
Sunday's developments come at a sensitive time for the Fed. On Wednesday it is expected to announce a plan to start winding down its massive stimulus, perhaps one of the most pivotal policy manoeuvres ever attempted by the U.S. central bank.
Summers is the second high profile potential nominee to withdraw under pressure in Obama's second term. Susan Rice, now Obama's national security advisor, stepped back from consideration to be secretary of state over controversy surrounding her role in explaining the 2012 attack in Benghazi, Libya, that claimed the lives of four U.S. government employees, including the ambassador.