With Summers out, investors bet on Yellen for Fed

(MoneyWatch) Is Federal Reserve official Janet Yellen a shoo-in to take the helm at the central bank now that Lawrence Summers has helpfully fallen on his sword?

Investors seem to think so. The Dow Jones industrial average jumped 118 points Monday after Summers, a former top economic adviser to President Barack Obama, withdrew his name from consideration for the post this weekend. That seems to clear the way for Fed vice chairwoman Yellen, whom the White House has said is, along with former Fed official Donald Kohn, a candidate to succeed current Fed chief Ben Bernanke. 

• Stocks gain as Summers leaves
• Lehman is gone, but new financial crises may await
• More than 350 economists back Yellen for Fed chair

"Janet Yellen should now be regarded as the front-runner to succeed Chairman Bernanke, although the White House has not indicated their choice," said Michael Hanson, senior U.S. economist with BofA Merrill Lynch Global Research, in a research note.

Yellen, a close ally of Bernanke, has been an aggressive proponent of extending the extraordinary support the Fed has used since the 2008 financial crisis to help nurse the U.S. economy back to health. With economic growth and job-creation still weak, many investors appear to think Yellen is less committed to scaling back the Fed's  $85-billion-a-year program to buy Treasury and mortgage bonds. The Fed implemented that policy, known as quantitative easing, in 2008 to prop up the economy, and it has helped propel stocks to record highs.

"The view was that a Summers Fed would more abruptly pull back from quantitative easing, while supposedly a Yellen Fed would be more gradual in tapering or winding down asset purchases," said Richard Peterson, director of global markets intelligence at financial research firm S&P Capital IQ.

Whether that view is correct is unclear. Critics of Summers, a former Harvard University economist who also served as Treasury Secretary under President Bill Clinton and who was Mr. Obama's top economic adviser in 2009 and 2010, have long noted his close ties with Wall Street. Under Clinton, Summers also championed the push to deregulate the financial industry. 

In short, Summers does not have the kind of resume that normally elicits concern among institutional investors, corporate chieftains and other moneyed interests with a major stake in monetary policy. Opposition to Summers came from more liberal Senate Democrats, who objected to handing leadership of the Fed to someone whom they said was implicated in the financial crisis. He has also made enemies on the right, including lawmakers who oppose central bank interventions in general.

Yellen, too, could face opposition from those GOP lawmakers, many of whom favor a speedier end to the Fed's bond purchases. The Federal Open Market Committee, the central bank's monetary policy-setting panel, could announce plans to begin unwinding the bond purchases after it completes a two-day meeting on Wednesday.

"It boils down to politics," said Paul Ashworth, chief U.S. economist with Capital Economics. "Given that she's considered the most dovish candidate, you would expect Republicans to go after her nomination."

Ashworth also said Mr. Obama might be wary of nominating Yellen for fear of appearing to cave to Congress. The White House has identified Kohn, a former Fed vice chairman and now a senior fellow at the Brookings Institution, as a candidate to succeed Bernanke.

Other potential candidates whose names have been bandied about include former Fed vice chairman Roger Ferguson, now CEO of financial services provider TIAA-CREF; former White House economic adviser Alan Krueger; and ex-Treasury chief Timothy Geithner. With Bernanke scheduled to leave the Fed in January, the White House is expected to nominate a replacement this fall.