The president confirmed that he had accepted Ms Tanden’s request to have her nomination withdrawn for the role on Tuesday evening.
And he said that she would still serve in his administration in a role that does not require Senate confirmation.
“I have accepted Neera Tanden’s request to withdraw her name from nomination for Director of the Office of Management and Budget,” said Joe Biden in a statement.
“I have the utmost respect for her record of accomplishment, her experience and her counsel, and I look forward to having her serve in a role in my Administration. She will bring valuable perspective and insight to our work.”
It is the first confirmation failure of a cabinet nominee under Mr Biden.
Democratic Senator Joe Manchin announced last month that he would not vote to confirm Ms Tanden, leaving the White House needing to find one Republican vote.
“I am writing to you to withdraw my nomination for Director of the Office of Management and Budget,” said Ms Tanden in her letter to the White House.
“It has been an honor of a lifetime to be considered for this role and for the faith placed in me.
“I appreciate how hard you and your team at the White House has worked to win my confirmation.
“Unfortunately, it now seems clear that there is no path forward to gain confirmation, and I do not want continued consideration of my nomination to be a distraction from your other priorities.
“I am incredibly grateful for your leadership on behalf of the American people and for your agenda that will make such a transformative difference in people’s lives.”
Republican Senator Kevin Cramer welcomed the decision for Ms Tanden to withdraw her nomination, calling her a “poor manager” who supports “toxic far-left policies.”
“She was the wrong choice for this position,” he said.
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