Finance
Powell speaks on Capitol Hill this week with politics front and center
Federal Reserve Chairman Jerome Powell speaks at a news conference on June 18, 2025, in Washington DC, United States.
Yasin Ozturk | Anadolu | Getty Images
Federal Reserve Chair Jerome Powell heads to Capitol Hill this week, facing increasing pressure both from outside and inside the central bank to start the push for lower interest rates.
Powell’s semiannual testimony to Congress kicks off Tuesday morning, as the central bank leader presents the Fed’s monetary policy report to the House Financial Services Committee. He then heads to the Senate Banking Committee on Wednesday.
Generally, the congressionally mandated sessions allow the Fed chair to drop some basic comments about the state of the economy and monetary policy. Legislators then get a chance to ask questions, which occasionally can turn hostile but are rarely anything severe.
But the backdrop to this appearance is different: Not only President Donald Trump but also multiple White House officials have cranked up the heat on Powell to start lowering rates, and now he’s faced with two key Fed officials who have spoken out in recent days to say they likely will favor a cut as soon as July.
That combination of factors has Wall Street buzzing with the possibility that the normally politics-free Federal Open Market Committee is now seeing some of its protective cover erode.
“There’s some political influence starting to come into the FOMC,” Mohamed El-Erian, chief economic advisor at Allianz, said Monday on CNBC.
El-Erian’s comments came shortly after Fed Governor Michelle Bowman said during a speech in Prague that she could see a case for starting to ease policy next month so long as inflation data stays in line.
Coupled with similar remarks Friday on CNBC from Governor Christopher Waller, there would appear to be at least some pushback against Powell’s repeated statements last week that policy is well-positioned for a more patient approach as tariff impacts play out.
What’s more, Waller and Bowman both are Trump appointees dating from his first term in office, and both have been mentioned as potential candidates to succeed Powell next year.
“Now suddenly we’ve had two Republican-leaning governors who came out with this notion of July, and they’ve moved the market,” El-Erian said. “What I do know is that Jay Powell is going to have a lot of difficulty trying to get everybody unified on a message.”
Indeed, traders have upped the odds of a July cut to about 23%, and a much more definitive 82% behind a September move, according to the CME Group’s FedWatch gauge of futures pricing.
More immediately, Powell could have a contentious two days ahead of him as he tries to explain the Fed’s position in the face of what could be some antagonism on both side of the congressional aisle. Following Trump’s lead, Republicans are likely to quiz Powell on what the hold-up is for easier monetary policy, while liberal Sen. Elizabeth Warren (D-Mass.) has been urging Powell to cut as well.
The trouble with Trump’s call
However, Trump’s desire for dramatic cuts — he has suggested at least 2 percentage points’ worth — are unlikely to materialize, either.
In his CNBC interview, Waller said he wants to “start slow” with cutting. At last week’s FOMC meeting, participants suggested that the end point, or terminal rate, for the fed funds rate would be around 3%, which is just 1.25 percentage points below the current level.
Beyond that, such dramatic moves could be counterproductive.
When the Fed cut by a full percentage point from September through December of last year, Treasury yields actually moved higher, almost in tandem with the reductions, as bond market investors priced in the potential for faster economic growth and higher inflation.
“The idea that the Fed does something and there’s immediate transmission and everything works exactly the way it’s supposed to work is just a myth,” said Jai Kedia, a research fellow at the Cato Institute, a libertarian think tank. “You know, people way overvalue the Fed’s effect on the economy, especially in an immediate kind of manner.”
Nevertheless, the administration is demanding immediate action from Powell, notwithstanding that the chair is just one of 12 voters on the committee that sets interest rates.
Bill Pulte, director of the Federal Housing Finance Agency, posted Monday on X that momentum is “building for Powell’s immediate resignation” — which Trump has not called for — adding that “it is clear that Powell’s political bias against our great President needs to be looked at.”
The Fed’s mission
Kedia, though, said the White House’s demand for dramatic action from the Fed is irresponsible.
For one, he said reducing federal borrowing costs isn’t the Fed’s job.
“The Fed’s mandate is actually to stabilize inflation and stabilize employment,” Kedia said. “We can debate whether it should have that mandate, or how successful it’s been in doing that, but if you put it in charge of the federal debt, you may as well kiss that mandate goodbye.”
Like El-Erian, Kedia does believe the Fed could start cutting rates, though market pricing favors September rather than July for the first move. FOMC members were split at last week’s meeting over the path and extent of cuts.
Kedia said that if Powell and the rest of the FOMC consider following a course that Trump is trying to push, it risks losing the economy as well as its reputation.
“Now I do think that the rates are slightly too high, but the reason to cut rates is basically if you’re following a monetary policy rule, or you’re looking at guidance from the macro economy, none of which will tell you that you have to reduce rates by as much as President Trump wants them to be reduced by,” he said. “A good economic case can be made that the Fed should cut rates, but that’s got nothing to do with the political aspect.”
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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