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Push for Yellen to lead at Fed gathers steam

Janet Yellen
Kiyoshi Ota | Bloomberg | Getty Images
Janet Yellen

Janet L. Yellen told friends in recent weeks that she did not expect to be nominated as the next chairman of the Federal Reserve. Although she had been the Fed's vice chairman since 2010 and would make history as the first woman to hold the job, President Obama's aides made clear throughout the summer that he wanted Lawrence H. Summers, his former chief economic adviser.

Now, awkwardly, it appears that the president may have to circle back to Ms. Yellen after Mr. Summers withdrew from consideration on Sunday, bowing to the determined opposition of at least five Senate Democrats. On Monday, Ms. Yellen became the front-runner by elimination, officials close to the White House said.

Supporters of Mr. Summers, including many of the president's closest advisers, had raised some concerns about Ms. Yellen in recent months. Perhaps most potently, they said that institutions benefited from fresh leadership and argued that Ms. Yellen's crucial role in creating the Fed's current policies could inhibit her ability to make necessary changes.

Some presidential advisers also argued that Mr. Summers brought crisis management experience and a working knowledge of financial markets that Ms. Yellen lacks — although so did Ben S. Bernanke when President George W. Bush selected him as chairman.

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There have been tensions between Ms. Yellen and Daniel Tarullo, a Fed governor with close ties to the president's economic team who has taken a leading role on issues of regulatory policy. Ms. Yellen also clashed with Gene B. Sperling, head of the National Economic Council, when both were advisers to President Bill Clinton in the 1990s.

Nonetheless, the president's advisers insisted throughout the summer that Mr. Obama was not averse to Ms. Yellen but simply more comfortable with Mr. Summers, a former Treasury secretary to President Clinton who was Mr. Obama's chief White House economic adviser through the height of the financial crisis and recession in 2009 and 2010. In those years he formed a bond with Mr. Obama and others in the White House despite a tendency toward arrogance.

Stock markets soared on Monday on the withdrawal of Mr. Summers. Many investors regarded him as less committed to the Fed's monetary stimulus campaign than Ms. Yellen. In trading, the Dow was up 118 points and interest rates down in a show of increased confidence that the Fed would withdraw more slowly from its efforts to stimulate the economy, including bond purchases.

Ms. Yellen's supporters waited with a mixture of elation and apprehension for the president's next step. "Janet Yellen, I hope, will make a terrific Federal Reserve chair," Senator Elizabeth Warren, a Massachusetts Democrat who was one of those warning the White House against a Summers nomination, said on MSNBC. "The president will make his decision, but I hope that happens."

(Read more: Market sees $15 billion Fed taper soon: CNBC survey)

Administration officials and supporters acknowledged that the president would enrage his party's base if he were now to reject Ms. Yellen and forfeit the chance to name the first woman to the most influential economic job in the world. On the other hand, with no obvious alternatives, the choice of Ms. Yellen — which months ago might have been celebrated as historic — is likely to be seen as Mr. Obama's reluctant capitulation to his party's left wing.

That prospect, and Mr. Obama's distaste for being pressured into some action, could prompt him to consider other candidates, several former administration officials said.

The president had already interviewed Donald L. Kohn, a former Fed vice chairman, before Ms. Yellen got the job in 2010 on Mr. Obama's nomination. For years, Mr. Kohn was among the most influential advisers to former Fed chairman Alan Greenspan and thus would have drawn criticism from Democrats, many of whom blame the Greenspan Fed for an antiregulatory stance that encouraged financial excesses that led to crisis.

(Read more: Fed putting 'beer goggles' on investors: Pro)

In the midst of the speculation that Mr. Obama might broaden his search, former Treasury Secretary Timothy F. Geithner got word to the White House early on Monday that he still was not interested in the Fed nomination that Mr. Obama had long made clear was his for the taking. Mr. Geithner's stance is based on personal considerations, but as someone who was closely associated with Mr. Summers in the Clinton and Obama administrations, he would probably not be any more popular with the liberal groups emboldened by Mr. Summers's exit.

Mr. Geithner, who was president of the Federal Reserve Bank of New York before he joined the administration in 2009, said in January as he left the Treasury that there was "not a chance" he would accept a nomination to be Fed chairman. "I have great respect for the institution, but that will be someone else's privilege," he said then.

(Read more: A late Summers day rally, but don't ignore the Fed)

On Monday, the Dow Jones industrial average rose 118.72 points, or 0.8 percent, to close at 15,494.78. The Standard & Poor's 500-stock index rose 9.61 points, or 0.6 percent, to 1,697.60. The Nasdaq composite fell 4.34 points, a fraction of a percent, to 3,717.85, pulled down by a loss at Apple.

In the market for government bonds, the price of the benchmark 10-year Treasury note rose 8/32, to 96 29/32, and its yield fell to 2.86, from 2.89 late Friday.

Despite the rise in the markets, Wall Street remains eager to see the end of the uncertainty about who will succeed Mr. Bernanke when his second four-year term ends on Jan. 31. Once Mr. Obama nominates a successor to Mr. Bernanke, confirmation hearings and Senate votes could consume months.

The White House, preoccupied with a mass killing at the Washington Navy Yard on Monday, gave no sign whether Mr. Obama would soon announce a nominee. Officials indicated no announcement was likely this week, which happens to coincide with a regular meeting of the Federal Open Market Committee, its decision-making panel.

But numerous people close to the White House said a decision should come as soon as possible.

Democrats on Capitol Hill said Ms. Yellen was likely to be confirmed by the Senate.

Described by one former colleague as "a small lady with a large I.Q.," Ms. Yellen forged an academic career at the University of California, Berkeley as a member of the economics counterculture that attacked the dogma of efficient markets. She has long argued that markets benefit from regulation to prevent abuses and limit disruptions of economic growth.

She also played a leading role in shaping what has become the conventional wisdom that central banks, for the sake of job growth, should seek to moderate rather than eliminate inflation.

Mr. Clinton nominated her to a seat on the Fed's board of governors in 1994 and then made her head of his Council of Economic Advisers in 1997. She then returned to Berkeley and in 2004 became president of the Federal Reserve Bank of San Francisco, where she remained during the worst of the crisis before coming back to the Fed as vice chairman in 2010.

Ms. Yellen, known as a careful thinker with a self-effacing manner, did not see the job as an audition for anything larger, according to friends. But her role in making the case for the Fed to take stronger action to reduce unemployment won her wide notice among liberal Democrats. In addition, women's groups yearned for a woman to lead the Fed for the first time.

As vice chairman, she has alternated with Mr. Bernanke in representing the Fed at international meetings and she is widely respected by her peers at other central banks. She has overseen Washington's relationship with the 12 regional reserve banks, and has used the opportunity to cultivate the presidents of the regional Feds, five of whom vote each year on monetary policy.

Most important, she has led a committee devoted to improving the Fed's communications with its primary audience, investors, and with the broader public, a goal she shared with Mr. Bernanke. Under Ms. Yellen, the committee built an internal consensus for changes, including Mr. Bernanke's regular news conferences and the declaration that the Fed thinks 2 percent annual inflation is just right.

—By New York Times' Jackie Calmes and Binyamin Applebaum. Annie Lowrey contributed reporting.

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