Finance
Trump’s next Fed chair pick already comes with a credibility problem
The silhouette of a pedestrian is seen walking past the Marriner S. Eccles Federal Reserve building in Washington, D.C
Andrew Harrer | Bloomberg | Getty Images
If leading the Federal Reserve isn’t challenging enough, the next central bank chair faces an additional burden: credibility issues now that President Donald Trump has stepped up efforts to exert a heavy hand on monetary policy.
Whoever the successful candidate is could carry the specter of being there simply to do Trump’s bidding on interest rates, violating the Fed’s traditionally apolitical veneer.
To exert more influence in the near term, Trump reportedly is considering naming a “shadow chair” until the current occupant, Jerome Powell, leaves office next year, in an attempt to pressure the Fed into cutting rates.
The prospect leaves a series of thorny questions.
Beyond the awkward logistics of such an arrangement, there are potentially troublesome implications both institutionally for the Fed and for financial markets that count on it to make data-driven decisions free of outside influence.
“Naturally, this is an idea that leaves many investors feeling uneasy,” Dario Perkins, senior European economist at TS Lombard, said in a note Tuesday titled “Can We Trust the Next Fed Chair?” “Suddenly all the talk is of the Fed ‘losing independence’ and of there being a new era of ‘fiscal dominance’ – not helped by the fact that Trump is explicitly linking his demand for lower rates to reducing debt-servicing costs.”
Indeed, Fed officials generally make decisions in service to their twin goals, or “dual mandate,” namely to promote stable inflation or full employment.
What Trump has been demanding is different — he has been hectoring Powell and his fellow Federal Open Market Committee officials, in increasingly belligerent terms, to cut rates to lower financing costs for the government’s ever-burgeoning debt load. Trump insists the Fed could save taxpayers some $800 billion by aggressively lowering its overnight funds rate, which currently sits at 4.33%.
Powell and his predecessors have repeatedly held the line that the public fiscal situation does not and will not play a role in rate decisions. Veering outside the traditional Fed decision-making parameters would pose further questions for the next chair’s credibility.
Advantages and disadvantages
“The real loser here is not Jay Powell but his successor,” Perkins wrote. “We don’t even know who that person is, and already there are strong doubts about their integrity and what sort of ‘deal’ they have made to secure the position. But it seems pretty clear that Powell’s replacement will come with a ‘tacit understanding’ to cut rates.”
To be sure, central bank experts acknowledge that there is some benefit to Trump wanting to get ahead of the game in naming the next Fed chair.
Powell’s term as chair ends in May 2026, so nominating a replacement perhaps a few months early would give the prospective nominee the chance to get through the Senate confirmation process and bone up on the myriad responsibilities that the position carries.
But Trump’s idea is different.
Such a “shadow chair,” under the market’s understanding and in conjunction with statements that Trump and his lieutenants have made on the matter, would be in place almost explicitly to undermine Powell. Should Powell not budge on pushing for rate cuts, the shadow chair could simply make public statements contrary to that position.
However, finding a candidate to fill that role might not be so easy considering the reputational risks.
“From the perspective of the nominee, there’s nothing good about being nominated far out in advance and being expected to serve as a shadow Fed chair. That can only end poorly,” said Lev Menand, an associate professor of law at Columbia Law School and author of the 2022 book, “The Fed Unbound: Central Banking in a Time of Crisis.”
“It could lead to reputational harm. It could lead to pressure on you to say or do things in the run up to actually taking office that you don’t want to say or do,” he added. “It could lead to your nomination being yanked. It could lead to all sorts of bad things. So there’s nobody who’s seeking the Fed chair job who’s going to want to be put up early, except someone who’s told you won’t otherwise get it.”
Markets might not like it
Treasury Secretary Scott Bessent has been mentioned prominently as a potential Powell replacement, along with several others.
In an Oct. 9, 2024, interview with Barron’s, less than a month before Trump’s election victory, Bessent said, “You could do the earliest Fed nomination and create a shadow Fed chair.” In such a case, “no one is really going to care what Jerome Powell has to say anymore.”
How financial markets would react to such a scenario is unclear. However, Wall Street is notorious for disliking uncertainty, especially with something as sensitive as monetary policy.
The last time the Fed cut rates, in late 2024, stocks rose but so did Treasury yields while the dollar fell. Rate cuts on the scale Trump is seeking — 2 percentage points or even more — could stoke inflation fears and send Treasury yields higher again.
“A good case could be made for nominating the next Fed chair a few months before the handover in May 2026,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a recent note. “But nominating the next Fed chair now with the expectation that this person would be an active alternative voice on monetary policy for the best part of year would confuse the market, making it harder for the Fed to shape rate expectations and potentially … in ways that would not help advance rate cuts.”
Trump has a further set of logistics to navigate as he pushes his desire for lower rates.
Rate cuts aren’t certain
There is only one upcoming vacancy on the board of governors, with Adriana Kugler’s term up at the end of January 2026.
Powell’s time as chair runs out in May 2026, but he can stay on as governor until 2028. In the past, most Fed chairs have stepped down after the time at the helm ended; should Powell not go that route, he would then force Trump to name a current sitting governor as his successor, eliminating presumptive candidates such as Bessent, former Governor Kevin Warsh and current National Economic Council leader Kevin Hassett.
Moreover, the chair is just one voter out of 12 on the Federal Open Market Committee. While there currently are disparate views from policymakers on how quickly rates should come down, there are no members who have indicated they support the kind of cuts Trump seeks.
Investors will get a further peek into the Fed’s thinking when minutes of the June FOMC meeting are released Wednesday.
“This is all somewhat unprecedented how things would develop,” Menand said. “But I think that it’s safe to say that depending on how it’s rolled out, it could really ultimately unsettle expectations and change how some of these dynamics unfold in the fall.”
Markets expect the Fed will start cutting again in September, but the path from there is unclear. Should Trump name the shadow chair in the fall, it comes with the risk of both unsettling markets, and of causing problems for whomever he picks.
“Depending on who it is, it could have no effect, really at all, on Powell’s ability to govern for the remainder of his term, or it could actually be quite disruptive,” Menand added. “What would actually happen if the person was named in advance? The devil would be in the details.”
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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