Obama Fed pick withdraws, slams partisan politics

By Mark Felsenthal and Kristina Cooke

WASHINGTON/NEW YORK (Reuters) - Nobel Prize winner Peter Diamond said on Sunday he planned to withdraw as a nominee for Federal Reserve governor, after his nomination was repeatedly opposed by Republicans.

The top Republican on the Senate Banking Committee, Richard Shelby, has criticized Diamond, saying he lacks monetary policy experience.

Diamond's withdrawal, a recognition that Republican objections could not be overcome despite three committee votes approving him, leaves the White House with two vacancies to fill on the seven-seat Fed board as the central bank debates what to do about a weak economy recovery after its $600 billion bond buying program ends this month.

Diamond's nomination fell victim to Republican score settling -- under Democratic control, the Senate in 2008 blocked a nominee of Republican President George W. Bush. Another factor was a newly invigorated opposition to government and monetary intervention to stimulate economic growth during recessions.

The failure of the nomination of the MIT professor, an expert on pensions and behavioral economics, is also an indication of deep partisan divides over economic issues on Capitol Hill.

Disagreement over spending cuts has stalemated efforts to raise the U.S. debt ceiling, raising the possibility, however remote, of a U.S. debt default.

"It's a pity since Diamond's work on labor markets would be of importance to the committee," said Michael Gapen, a former Fed economist now at Barclays Capital. "This was a case of politics winning out over pragmatism."

The shaky U.S. economy -- in which unemployment is over 9 percent two years after the formal end of the recession -- is a major liability for President Barack Obama as he prepares to seek reelection in 2012.

Data on Friday indicated the economy may be in for a long period of soft growth after employers hired the fewest number of workers in eight months in May.

In his article, Diamond bemoaned the rise of political pressures on central bank decision-making.

"We should all worry about how distorted the confirmation process has become, and how little understanding of monetary policy there is among some of those responsible for its Congressional oversight," he said.

"We need to preserve the independence of the Fed from efforts to politicize monetary policy and to limit the Fed's ability to regulate financial firms."

Among names that have been mentioned for Fed vacancies in the recent past are Raphael Bostic, an economist at the Department of Housing and Urban Development who has worked at the Fed and William Spriggs an economist at the Labor Department who also worked on Capitol Hill.

(Editing by Ron Popeski & Kim Coghill)