Financial markets around the world seemed to welcome news that former U.S. Treasury Secretary Lawrence Summers has withdrawn his name for consideration to be the next Chairman of the Federal Reserve. The news broke on Sunday, when a letter that Summers wrote to President Barack Obama announcing his desire to withdraw was published online.
Summers wrote that, ”This is a complex moment in our national life. 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.”
The acrimony surrounding Summers’s candidacy has been tangible over the past few months and it has contributed to market tension. As rumors circulated that Summers was President Barack Obama’s favored nominee, Democratic members of Congress, economists, and the public organized and pushed back. Several Democratic members of the Senate have come forward publicly stating that they would oppose Summers’s nomination while 350 economists have signed a letter addressed to the president calling for the nomination of current Fed Vice Chair Janet Yellen.
Summers is a Democrat, but has (at best) mixed support from his own party. That Summers is one of the mad geniuses trolling the upper echelons of the government is something that even critics admit, but his intellectual reputation is often overshadowed by his personal reputation. Many of those who have worked with Summers report that he can be hard to work with, sometimes dismissive of ideas and people, and can be rhetorically combative.
As an economist, he is perhaps most well known for serving as the Treasury Secretary under President Bill Clinton from July 1999 to January 2001. He also served as Director of President Obama’s Economic Council in 2009-10 where he quickly earned the respect of the president. In part because of his relationship with President Obama, many considered him to be the president’s preferred candidate.
But public opinion is largely behind Yellen. Yellen has spent most of her career in the Federal Reserve system, and besides her current term as Vice Chair, she is probably most well-known for her service as President of the Federal Reserve Bank of San Francisco. Her personal reputation is pretty much the opposite of Summers — generally soft spoken, amiable, and a brilliant manager of differing opinions.
The economy and, in particular, government involvement in the recovery has become the biggest issue facing President Obama in his second term. Accommodating monetary policy has defined post-crisis economics and financial markets have become addicted to federal purchases of bonds and mortgage-backed securities. The future of monetary policy is directly related to — and in many ways, dictates — the ongoing narrative of the U.S. economic recovery. Whoever takes the chair after Ben Bernanke steps down in January will have considerable control over those policies.
The power of the Fed has expanded considerably over the past several years. As the financial sector toppled like a Jenga tower between 2007 and 2009, Bernanke helped orchestrate a new paradigm for financial regulation and set new precedent for the use of unconventional monetary policy.
The details of his decision-making have earned him a mixed reputation. Advocates argue that the accomodative policy championed by Bernanke over the past half-decade has been critical for U.S. economic growth, and without it, the nation might still be stuck in the ditch of recession. On the other hand, critics have argued that the Fed’s easy money has actually led to financial instability, incentivized risk-taking, and provided fuel for asset bubbles.
Whatever the case — whether history lionizes or demonizes him — Bernanke will leave the next Fed chairman with the keys to a car that has been totally retrofitted and souped up to deal with the unique challenges of a financially dense global economy. The new Fed has a lot more horsepower than it did in 2006 and comes with a $3.5 trillion balance sheet in tow.
As for the news that Summers has withdrawn his name for consideration, the markets are reacting favorably. Observers expected Summers to curb quantitative easing more aggressively than Yellen, and with his removal, the markets appear to expect monetary conditions to remain accomodative for longer.
Financial markets reacted quickly to the news. The Dow Jones Industrial Average climbed nearly 1 percent in early morning trading Monday, and the yield on the 10-year Treasury bond fell 0.11 points to 2.79 percent.