Finance
As regime change looms at the Fed, one candidate emerges as frontrunner for chair
Kevin Hassett, director of the National Economic Council, speaks to members of the media outside the White House in Washington, DC, US, on Friday, Oct. 24, 2025.
Francis Chung | Bloomberg | Getty Images
President Donald Trump knows who he’s going to select as the next Federal Reserve chair but isn’t saying yet. Prediction markets have their minds made up, but the front-runner also is playing it coy.
While that part of the mystery appears ready to clear up in the coming weeks, what’s far less certain is the type of environment the new central bank leader will face at a potential crossroads for the U.S. economy.
National Economic Council Director Kevin Hassett has been dubbed the clear favorite, buoyed by a Bloomberg News report last week that handicapped the five-person race to succeed current Chair Jerome Powell, whose term runs out in May.
Asked Sunday about the situation, Trump told reporters aboard Air Force One, “I know who I am going to pick, yeah. We’ll be announcing it.” Beyond that, he smirked when asked about Hassett, adding “I’m not telling you, we’ll be announcing it.”
The candidate himself made the rounds on the weekend talk circuit, also dodging questions about his prospects. Hassett is part of a field that also includes current Governors Christopher Waller and Michelle Bowman, former Governor Kevin Warsh and BlackRock fixed income chief Rick Rieder.
“I’m really honored to be amongst a group of really great candidates,” Hassett said Sunday on CBS’ “Face the Nation.” He did note that markets had a positive reaction to the report of him emerging as the favorite, saying that Americans “could expect President Trump to pick somebody who’s going to help them, you know, have cheaper car loans and easier access to mortgages at lower rates.”
Shortly before that, on Fox News, Hassett merely stated, “If he picks me, I’d be happy to serve.”
Predictions markets have been off to the races in recent days, placing firm odds on Hassett getting the job. As of Monday afternoon, Kalshi traders assigned a 79% probability, while PredictIt put the chance at 75% and Polymarket had it at just 63%, with “no announcement by Christmas” having the second-highest probability of 22%, easily topping any of the other four finalists.
A divided Fed
Whomever the actual pick is will take over a Fed that is currently torn between officials who think additional interest rate cuts are warranted to head off potential trouble in the labor market against those who worry that inflation continues to pose a threat that would be exacerbated by further easing in monetary policy.
For the next rate decision on Dec. 19, futures market traders are assigning an 87.6% chance of a cut in trading that has been highly volatile in recent weeks.
Trump and other administration officials have been vocal about their preference for much lower rates, and the president has stated that is a litmus test for the next chair. In 2026, members of the rotating cast of regional presidents who get a vote on the Federal Open Market Committee will have a hawkish tilt, meaning a preference to fight inflation and hold rates steady.
But the coming Fed regime will be about more than rates.
In a CNBC interview last week, Treasury Secretary Scott Bessent, who is leading the Fed chair search, said he favors a rethink of the Fed’s mission.
“We’ve gotten to this point where monetary policy has gotten very complicated, and it’s more than just cutting rates,” he said. “I think we’ve got to kind of simplify things.”
Call for reform
In particular, Bessent singled out the role of regional presidents.
While they play a relatively limited role — at least compared to the chair and the Board of Governors — in setting rates and other issues related to monetary policy, public commentary from the local leaders can move markets at times.
Bessent said that is part of broader issues related to outsized role the Fed has grown to play in the economy and financial markets, largely since the financial crisis when the central bank played a pivotal role in implementing programs to guide the economy out of its worst slide since the Great Depression.
“I think it’s time for the Fed just to move back into the background like it used to do, calm things down and work for the American people, set monetary policy on a good course,” he said. “All these speeches by these bank presidents … are just redundant. Why don’t they actually just come out and talk about the meaningful issues to the American people, rather than the short term view of the next meeting?”
The view on regional presidents is important in that they come up for reappointment in 2026. While the local board’s hire the presidents, they are subject to the Board of Governors’ approval. One issue Bessent also commented on was that several presidents are not from the districts they represent.
Mohamed El-Erian, the chief economic advisor at Allianz, applauded Bessent’s view.
“We don’t need a play-by-play Fed,” El-Erian said Monday morning on CNBC. “We need the Fed to cool it. We need the Fed to step back and take a bigger, sort of visionary view. And we need reforms. We desperately need reforms. And I think all five on the short list are committed to reforming that institution, which is critical, not just for the U.S. but for the global economy.”
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
Sign up for our weekly newsletter that goes beyond the livestream, offering a closer look at the trends and figures shaping the ETF market.
New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
What that means for consumer loans
Checks and Balance newsletter: Of God and MAGA
Why software stocks, 2026’s market dogs, have joined the rally
Armanino adds Strategic Accounting Outsourced Solutions
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
