Finance
Here’s what it really means for Trump to get control of the Federal Reserve board
US President Donald Trump speaks during a meeting with Ukrainian President Volodymyr Zelenskyy and European leaders in the East Room of the White House in Washington, DC, on August 18, 2025.
Andrew Caballero-Reynolds | AFP | Getty Images
President Donald Trump’s effort to sack Federal Reserve Governor Lisa Cook is about more than firing someone: It’s a maneuver that, if successful, would mark a seismic shift for an institution that for ages had been considered above politics.
Since taking office in January, Trump has placed the Fed directly in the crosshairs of executive power. He has berated central bankers for not lowering rates, threatened to remove Chair Jerome Powell, and now has taken the unprecedented step of actually attempting to unseat Cook.
From the president’s perspective, he’s looking to reform what has been an unpopular institution, often blamed for the runaway inflation that hit the U.S. following the Covid pandemic. Trump sees lower interest rates as a pathway to manage the swelling federal debt while boosting a housing market that has been a counterweight to an otherwise growing economy.
However, legal scholars as well as financial market experts and present and former Fed officials say Trump’s moves not only threaten to make the Fed more political but also would undermine key pillars of the American financial system.
“We are on a road that is going to lead to the erosion of central bank independence,” said Kathryn Judge, a professor at Columbia Law School. “It would be incredibly costly for the long-term health of the economy for the Fed to lose the credibility that it has spent decades trying to build.”
Independence in the Fed’s case is a term used to describe its freedom from outside political influence to determine monetary policy that is best for the U.S. economy. This is particularly the case if those decisions are unpopular, such as when the Federal Open Market Committee raises interest rates to bring down inflation.
But there’s more at stake than simply the level of the three rates the Fed controls.
What the board controls, and what it doesn’t
Should Trump get a majority of members on the board of governors to vote the way he wants — and the evidence right now, to be sure, is scant that he can ever achieve such a goal — it would give him access to key levers that control the economy as well as the nation’s financial infrastructure.
The seven-member Board of Governors, for instance, has regulatory and enforcement power over banks.
Moreover, while the 12-member FOMC sets the key overnight funds interest rate, the governors alone establish the discount rate, used to find the present value of money, and the interest on reserve balances, which pays banks for storing their money at the Fed and also serves as a kind of guardrail for the funds rate.
Finally, the board has control over the reappointments of the 12 regional bank presidents, with a slew of names coming up in 2026.
Embedded within those responsibilities is the Fed’s role in ensuring the integrity of the Treasury system and preserving a stable dollar.
In other words, this is about more than just getting a rate cut in September.
“The most serious danger, I think, to people’s being able to have confidence in the Fed board is what Trump is himself doing,” said Robert Hockett, a professor at Cornell Law School. “Because if Trump succeeds with this, then it suggests the Fed board is nothing but a rubber stamp. It just basically tells us that any nutjob who happens to get into the White House will be setting monetary policy henceforth.”
The effect, Hockett added, is that “we can have the same kind of hyperinflations in the future that banana republics in Latin America have classically had when their dictators have set monetary policy, or that Turkey has experienced in recent years because its dictator has set monetary policy.”
What Trump wants to achieve
For the administration’s part, Trump’s lieutenants largely say they believe in Fed independence but see the central bank as institution run amok that needs reigning in.
However, the president has conceded he will litmus test nominees for board vacancies on their willingness to lower rates, and he in the past has advocated getting a say in the Fed’s rate decisions among other measures that might be considered intrusions into the central bank’s space.
“I don’t think it’s an undermining of Fed independence. I just think it’s the fact the system needs a wholesale reevaluation and President Trump just does things unconventionally,” said Joseph LaVorgna, a senior economist during the first Trump term and now counselor to Treasury Secretary Scott Bessent. “There definitely has been mission creep on behalf of the Fed getting into climate change and issues of diversity and inclusion and things that certainly go well beyond their mandate.”
In fact, the notion that the Fed needs an overhaul has support on Wall Street.
Mohamed El-Erian, the former Pimco executive and now chief economic advisor at Allianz, recently advocated that Powell step down as chair to avoid just the kind of battle over independence that is happening now. Moreover, he said the Fed’s own policy mistakes helped precipitate the current battle.
“This is the exact world that I was worried about,” El-Erian said Friday on CNBC. “The Fed is vulnerable on so many different fronts, and I fear now that we’ve started going down this road that I really dread.”
Among the reforms El-Erian spoke of included taking after the Bank of England and allowing “external members” onto its policymaking group “that bring a difference perspective and that help reduce the risk of groupthink.”
Also, he said the Fed should reconsider its 2% inflation target, something that Powell repeatedly has said is not on the table.
The end game
However, critics say that what Trump is talking about goes beyond mere structural reforms.
“This is really a story about trying to undo what had been 90 years of Fed independence,” former Fed Vice Chair Roger Ferguson said on CNBC. “The whole goal was to give the Fed independence in doing this very important thing, which is setting monetary policy. And now, for the first time, we’re seeing a direct effort to undermine that.”
How successful Trump will be in doing so is another matter.
Currently, he has two appointees, Christopher Waller and Michelle Bowman, on the board. Stephen Miran is awaiting Senate confirmation to fill the seat vacated by Adriana Kugler’s resignation. Should Powell leave next May when his term as chair runs out, that would create another vacancy and give the president five seats.
However, counting on all those members as automatic votes is risky.
Both Waller and Bowman have shown strong independent streaks, taking both out-of-consensus hawkish and dovish positions depending on circumstances, and are unlikely to be “little apparatchiks for Trump,” the Cornell professor Hockett said.
“It’s unfair to the sitting governors to assume that they’re willing to operate as partisan hacks,” added Judge, the Columbia professor.
Also potentially standing in the way is a series of court tests that will focus on whether Trump has “cause” to remove Cook or anyone else.
If the president succeeds, it could have wide-ranging effects on the economy and markets, said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
“We think the baseline case at this point should be that there is very substantial Trumpification of the Fed through 2026 and – while this does not automatically correspond to a big lurch in policy and practice – we need to very seriously consider the likelihood that this leads to a rupture with past practice and a materially different reaction function with important implications for markets,” Guha said in a recent note.
The stakes also are high for the Fed’s future as an institution.
“There’s never been as dire a threat to Fed independence in our entire history as a republic as there is right now thanks to what Trump is doing,” Hockett said. “I do think that long term confidence in our central bank and hence in our currency will take yet another hit.”
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.”
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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.”
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