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End of the Fed? | Repocalypse 2.0?
The Wall Street Skinny
August 29, 2025
This Week on The Floor
President Trump fires Fed Governor Lisa Cook: can the President control the Federal Reserve?
The potential financial crisis no one is talking about: Repocalypse 2.0?
Markets Recap / Deal News
Interviewing this week? Here’s some content for your conversation.
Can the President Control the Federal Reserve?
Most people saw the headlines: “Trump Fires Fed Governor Lisa Cook”. What most people might not understand is how this action could bring the President one step closer to getting his desired interest rate policy.
President Trump previously hinted at replacing Jerome Powell, the Chairman of the Federal Reserve. But that isn’t enough to control interest rate policy in the US. Real power lies with the Federal Open Market Committee (FOMC), a 12-member voting body that sets interest rates by majority decision.
We therefore want to start by answering these five questions:
Who exactly sits on the FOMC?
How do they get there?
What do their terms look like?
How might the White House exert control over the central bank?
Why even bother to exert influence when the Fed JUST signaled they are likely to ease monetary policy at their next meeting?
To start, the Fed was deliberately designed to be insulated from partisan politics. The central bank’s mandate is to maximize employment while maintaining stable prices, not to bolster the economy to improve the approval ratings of whomever holds office. Think of the Fed like a parent who wants their kid to eat vegetables, while the president is the kid who’d prefer to stay up late eating candy and watching TV. Short term stimulus can have long reaching negative implications. And there has always been a political push and pull with regards to the Federal Reserve.
The Federal Reserve System is deliberately complex. It includes: seven governors, appointed by the president and confirmed by the Senate, who serve long 14-year terms to encourage continuity across administrations. The Fed Chair is one of these governors, but serves only a four-year renewable term as chair. Fun fact: when Powell steps down as Fed Chair, he still has time left as governor. Typically when a Fed chair steps down they also resign as governor, but they don’t have to. Alongside the governors are the presidents of the 12 regional Federal Reserve Banks, each serving five-year terms.
Together, these groups form the 19-member Federal Open Markets Committee (FOMC), though only 12 have a vote at any given meeting. The 12 voting members include all seven governors, the president of the New York Fed (always voting), and four rotating regional presidents. Boston, Chicago, St. Louis and Kansas presidents have the 2025 vote but there is a fixed annual rotation system, so next year it moves to Cleveland, Philadelphia, Dallas and Minneapolis.
Bottom line: policy decisions are taken by majority vote, among a committee whose exact composition changes annually.
That structure means a president can’t simply swap one person and steer monetary policy. But over time, through Senate-confirmed appointments and natural turnover, a president can influence the composition of both governors and bank presidents. For example, Trump placed Christopher Waller and Michelle Bowman on the board of governors in his first term. Waller in particular is widely viewed as a top contender to succeed Jerome Powell. Trump has also appointed another governor, Stephen Miran (who still needs to be confirmed by the senate). Now, if the firing of Lisa Cook is allowed to stand, the administration has an opening to appoint a fourth governor. That potentially sets up a board of governors amongst whom a majority would be aligned with the current administration.
What about the remaining 5 members of the FOMC, the presidents? Influencing governor confirmations allows a president to indirectly affect the appointment of bank presidents too, since they must be approved by the governors. It’s worth noting that all 12 bank presidents' 5 year terms come to an end February 2026, in less than 6 months. This creates a pathway to building a majority coalition on the FOMC.
So you might ask, why would Trump need to exert influence over the Fed when Jerome Powell just signalled in his Jackson Hole speech that the Fed would likely cut rates? The answer is a single rate cut likely is not enough. The Fed sets the target overnight Fed Funds rate, the overnight rate banks borrow at. Under normal circumstances this typically impacts longer term rates but it doesn’t have to as longer term rates are really a function of market participants buying and selling longer dated bonds and reflect the expectation of future inflation. With tariff policy and huge spending from the Big Beautiful Bill, long term inflation expectation may stay high meaning short term rate cuts won’t necessarily do much. To achieve Trump’s goal of lower longer term rates, the Fed may need to take more extreme measures. That may include measures that are themselves inflationary, like quantitative easing.
Ultimately, the question isn’t whether a president can wave a hand and control the Fed overnight, but whether political pressure over time chips away at the institution’s credibility. The real risk is not simply who casts the votes on the FOMC in 2026 or beyond, but whether households, businesses, and markets continue to believe that monetary policy is being guided by economic data rather than politics. If that trust erodes, the Fed’s most powerful tool, its ability to anchor expectations, weakens, and with it, the stability of the financial system itself.
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Potential Financial Crisis on the Horizon?
There’s a possible liquidity crunch coming that most investors aren’t paying attention to, but which could have significant implications for financial markets in the weeks ahead.
Last week, the Fed minutes from July contained a small but important detail that many missed while focused on questions of employment and inflation. Bloomberg flagged it, and after Powell was surprisingly dovish at Jackson Hole, I began to wonder if there’s more to this story than meets the eye.
The question is: are bank reserves about to become so depleted that the financial system of the country freezes up?
In order to answer this question, you first have to understand how we think about measures of cash in the system. A quick history lesson: post-2008 Global Financial Crisis, the Fed cut its target overnight rate range to 0-0.25% and implemented a program of Quantitative Easing that flooded the system with cash. In order to prevent rates from going negative, in 2014 the Fed implemented its Reverse Repo Facility. Money market funds, who were flush with cash but had run out of t-bills to buy, could now park money at the Fed and earn the lower end of the Fed funds target rate range. At the peak of QE, the Fed’s balance sheet had ballooned to $9tr, and the reverse repo facility peaked at $2.5tr in usage by the end of 2022.
Today, thanks to the current regime of Quantitative Tightening, both have come down significantly. The Fed’s balance sheet is about $2.3tr smaller, and the reverse repo program has been almost entirely drained, meaning: cash has left the system. Over that same time period though, bank reserves have remained relatively stable.
The potential problem? With the buffer of the reverse repo facility now gone, any incremental tightening from this point on will come from bank reserves, which currently sit at ~$3.3tr, a little over 10% of GDP. That might sound like a lot of money, but history suggests it may not be sufficient to maintain liquidity, especially with technical pressures looming in the near future. Corporate tax payments due September 15th will pull cash from deposits. The Treasury is also issuing a wave of new t-bills as it rebuilds its cash balance now that the debt ceiling limit has been raised, meaning money market funds with any inflows have somewhere to go with that cash. This is how reserve scarcity starts to build in the system. We don’t know exactly what the ratio of bank reserves to GDP needs to be to avert a crisis, but we’ve seen this movie before.
Nearly 6 years ago in September of 2019, reserves fell to $1.4tr, which was just shy of 6.5% of GDP. Repo rates spiked nearly 400 basis points almost instantaneously, causing a massive liquidity crisis. Highly levered longs, like those used in the Treasury basis trade (oftentimes leveraged 25:1 or more) were forced to violently unwind. The incident, known affectionately among some in the industry as the “repocalypse”, required emergency Fed intervention to restore market function. The Fed put in place the Standing Repo Facility as a result, where the Fed agrees to be the lender of last resort for cash collateralized by Treasuries at the top of the Fed Funds target range, thereby capping any such spike in repo rates.
But the Standing Repo Facility is a bandage, not a long term solution, if we do in fact reach a crisis of reserve scarcity. And signs of stress are slowly appearing, with 1-year Fed Funds/SOFR tightening (meaning, going MORE negative).
If we find ourselves in this predicament on the eve of the September Fed meeting, what happens? If reserve scarcity is indeed on the horizon, the Fed faces difficult decisions beyond just the outright level of rates. The Fed would likely need to consider easing monetary policy beyond just cutting its target overnight rate range by 25 basis points. And I wonder if this context explains why Powell’s tone at Jackson Hole was so much more dovish than many expected.