Lawrence Summers Is Out of the Fed Race!

The battle for the next Fed Chairman heats up!

Last weekend, Lawrence Summers, one of the stronger contenders for the position, had officially withdrawn his name from the small pool of Fed Chairman aspirants. In his letter to the President, Summers wrote that he “reluctantly concluded” that the confirmation process would not serve the Fed, the Administration, and Uncle Sam’s economic recovery.

Not only will Summers’ withdrawal mean a delay for the President from announcing another nominee, but this also puts Janet Yellen, the current Vice Chairwoman of the Board of Governors of the Fed, as the top pick to become the next Fed head.

If you’re wondering why this is such a big deal, then you should consider the main differences between Yellen and Summers. Yellen is considered a frontrunner for four reasons. First, she has extensive experience in the government financial system. She was also one of the first to predict the 2008 recession, and has the backing of lawmakers. Last but not least, Yellen is likely to pick up where Bernanke left off in terms of monetary policy biases.

Summers, on the other hand, isn’t as popular. Although he has served as economic advisor to Obama, he’s also known for pushing for the deregulation of derivatives, one of the culprits of the 2008 financial crisis.

Judging by how the dollar reacted to news of Summers’ withdrawal, it appears that market watchers are expecting a continuation of the Fed’s loose monetary policy with Yellen at the helm. After all, Yellen shares the same views with Big Ben when it comes to inflation and unemployment, as both believe that stimulus should be kept in place until the economy shows sustained improvements.

In fact, Yellen has recently focused on studying how the Fed’s monetary policy tools can be fully utilized to bring the U.S. economy back to full employment. Some analysts take this as a sign that Yellen would opt to carry on with the Fed’s bond-buying program during her term.

Of course this is all pure speculation for now as nothing is set in stone yet. Bear in mind that Obama is still considering a few other contenders for the job. Among these are David Kohn and Roger Ferguson, both of whom served as Fed Vice Chairman, and former Treasury Secretary Tim Geithner.

Take note though that Bernanke’s term ends in January, which gives him a good five months to work on passing the baton to the next Fed head. Do you think Janet Yellen is a shoo-in for the spot?