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Larry Summers Out; Obama “Mishandled” the Fed Nominating Process, Says Economist

Morgan Korn
Larry Summers Out; Obama “Mishandled” the Fed Nominating Process, Says Economist

U.S. markets opened higher Monday as investors cheered the news that Larry Summers, the front-runner to replace outgoing Fed Chairman Ben Bernanke, had withdrawn his candidacy to lead the U.S. central bank. Republicans and Democrats were deeply skeptical of Summers and many blamed him for the 2007-2009 financial crisis (Summers helped dismantle longstanding Wall Street regulations as Treasury Secretary during the Clinton Administration). In a letter to President Barack Obama, Summers -- a former top economic aide -- addressed the many challenges he faced in a potential confirmation process.

Related: Janet Yellen: Focusing on Her Gender Sets a "Dangerous Precedent" Says Heidi Moore

“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,” Summers wrote Sunday.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubushi, told clients that Summers’ exit boosted Bernanke’s legacy; Janet Yellen, the Fed Vice Chair and Bernanke adherent, had moved to the No. 1 spot to become the next Fed chief. Unlike Summers, Yellen, the former president of the San Francisco Fed and chairwoman of the Council of Economic Advisers, already has the support of Senate Democrats and “seems to be the public’s popular choice," Rupkey says. Moreover, Yellen has the “brains and the experience” to run the Fed and the markets would hail her nomination because she would continue the pro-growth policies that Bernanke championed, Rupkey adds.

Related: Larry Summers: Too Wrong for Too Long to Run the Fed, Task Says

“If you are a Fed watcher you may not have a lot to do over the next several years,” according to Rupkey. “Short-term interest rates are going to remain at zero for longer than you ever would have imagined.”

Rupkey says the most surprising aspect of the Summers news is how the Obama administration handled it; Rupkey describes it as “chaotic” and possibly “mishandled by the president."

“Why is [Obama] giving so much attention to Larry Summers as he bows out?” asks Rupkey. Obama should have quietly let Summers pull out and then nominated Yellen a few days later, he argues.

Members of the Federal Open Market Committee meet this Tuesday and Wednesday to discuss economic policy. Investors are expecting the Fed to announce a slowdown of its $85 billion bond-buying program.

Related: 5 Reasons the Fed Will NOT Taper in September: “What’s the Hurry?”

Breakout’s Jeff Macke and Matt Nesto will deliver live commentary about the markets and the Fed decision this Thursday at 9:25am ET – watch it on Yahoo Finance!

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