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Summers withdrawal removes pressure to cut Republican deals

President Obama and Larry Summers in file photo.
Saul Loeb | AFP | Getty Images

President Obama returns to economic themes this week just as his preferred candidate to lead the Federal Reserve, former Treasury Secretary Larry Summers, shocked many in Washington and on Wall Street by taking his name out of the running for the job.

In a phone call and letter Sunday, Summers told Obama that a fight over his nomination would be too acrimonious and possibly damaging to the Fed and the economy.

People close to Summers believe the White House waited too long to make the nomination, giving liberal Democrats time to organize a campaign to portray Summers as too close to banks and unfriendly to stronger regulation.

(Read more: Wall Street wanted Yellen anyway: CNBC survey)

Fairly or not, this characterization drove at least four Democratic members of the Senate Banking Committee to suggest to the White House that they would oppose Summers, meaning he would have needed significant GOP support just to get out of committee.

The White House might still have muscled Summers through but it would have meant cutting deals with Republicans, presumably on budget matters, something the White House does not want to do ahead of fights on funding the government and raising the debt ceiling.

(Read more: Bernanke staying still possible with Summers out?)

People close to the White House say current Fed Vice Chair Janet Yellen is now the overwhelming favorite to get the nod to succeed current chairman Ben Bernanke, whose term expires Jan. 31. Other candidates often mentioned include former Fed vice chairs Donald Kohn and Roger Ferguson.

Summers steps out of Fed race

Obama early on sounded out former Treasury Secretary Timothy Geithner for the Fed job but Geithner said he was not interested.

While Obama this week will speak on the five-year anniversary of the financial crisis and visit the Business Roundtable to discuss the economy, people close to the administration say he is not likely to announce his Fed choice this week. But these people caution that the schedule for a Fed announcement could change at any time.

While it is possible Obama could still bypass Yellen, who would be the first female Fed chair, doing so would likely enrage many on the left. It is not clear Obama would be willing to take such a risk after already failing to win liberal support for a bombing campaign in Syria. Obama may have to get Democrats on board for a budget deal with Republicans and alienating the liberal wing on the Fed nomination would make that effort significantly more difficult.

(Read more: Here it comes: Are you ready for the Fed to taper?)

Also in Washington this week: It will be all eyes on the Fed's Open Markets Committee meeting Tuesday and Wednesday with most forecasters calling for a small trim to the $85 billion in monthly asset purchases. The main question is whether recent soft employment data coupled with the real threat of a government shutdown and possible debt ceiling crisis leads the central bank's top policy makers to rethink their commitment to beginning the taper of asset purchases right away. Should the Fed decide to delay the taper it could send equity markets sharply higher.

— By Ben White, POLITICO's chief economic correspondent and a CNBC contributor. White also authors the daily tip sheet POLITICO Morning Money. Follow him on Twitter @morningmoneyben.