US markets up after Larry Summers backs out of Federal Reserve race

The decision by Larry Summers to back out of the race to replace Ben Bernanke at the helm of the US Federal Reserve when he steps down next year, has boosted expectations of a dovish outlook for the monetary policy in the world’s largest economy, driving up stocks and bonds.

Mr Summers, a former Treasury Secretary under President Bill Clinton and an ex-assistant to President Barack Obama for economic policy, emerged as the White House’s favoured candidate for the post earlier this summer. But his controversial past – he was a leading proponent of the deregulation of the financial sector during the latter days of the Clinton administration, and his resignation from Harvard after seeming to suggest that men outperformed women in certain subjects owing to biological differences, soon sparked dissent.

With key Democratic Senators opposing his candidacy, he eventually withdrew his name on Sunday, citing the prospect of a bad-tempered confirmation battle in Washington.

Mr Summers was viewed as a hawkish policymaker who would have been likely to slam the brakes on the Fed’s stimulus efforts and tighten policy faster than the other possible candidates for the job, so his withdrawal immediately boosted the markets, with global stocks scaling five-year highs on expectations that the expected reversal in policy would now be more gradual. By mid afternoon the Dow Jones was up 1 per cent at 15,536.

Attention is now focused on Janet Yellen, the vice-chair of the Fed and a highly-regarded economist. If appointed, she would be the first woman to lead the central bank. Whoever takes the job – other candidates include Donald Kohn, a former Fed vice-chair; Stanley Fischer, who ran the Israeli central bank; and Roger Ferguson, another former Fed vice-chair – will face the challenge of how to reverse the course of monetary policy. Many expect the Fed to announce a reduction in its $85bn-per-month bond-buying programme tomorrow, setting the stage for a cycle of monetary tightening.

Race for the Fed: runners and riders

Janet Yellen

With Mr Summers’s departure, Ben Bernanke’s deputy is widely perceived to be in the lead. She has been at the Federal Reserve since 2010, working with Mr Bernanke to shape the central bank’s policies, experience that, supporters say, will offer continuity at a time when the Fed is considering a major shift in its policy stance.

Donald Kohn

Fast emerging as the leading alternative to Ms Yellen, Mr Kohn is a 40-year veteran of US central banking and served as the vice-chair of the Fed’s board of governors between 2006 and 2010.

Stanley Fischer

A dark horse candidate, Mr Fischer stepped down from the top job at the Israeli central bank earlier this year. A respected economist, he was formerly a top official at the International Monetary Fund.

Tim Geithner

The former Obama Treasury Secretary has no shortage of friends in the current administration and as an ex-head of the New York Federal Reserve during the crisis, he has the experience for the job. But he has consistently denied any interest in the post.