Her promotion to deputy national security adviser last month triggered early speculation that McFarland's days on the National Security Council were numbered.
McFarland initially resisted, but later accepted the reassignment, which the administration official characterized as a promotion to a critically important diplomatic post with a key US ally in the Pacific region.
Reports said the controversial decision to give Bannon a seat at the table was meant to allow him to be Trump's eyes and ears at the NSC meetings and to monitor Flynn.
Another White House official, Dina Powell, was recently named deputy national security adviser for strategy and has been present in the recent high level meetings with delegations from Saudi Arabia, Egypt, Jordan and China. McFarland was one of the top NSC officials during the Michael Flynn era, which lasted under one month as Flynn was forced to resign in February over misleading statements about contacts with Russian Federation.
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McFarland will not be leaving the administration, however, as she will reportedly be nominated to be the USA ambassador to Singapore, a significantly lower-profile role, which will be subject to Senate confirmation. McFarland was hired by Flynn.
McFarland was offered the ambassador position last week, and submitted the paperwork, although she has not yet been formally nominated by the president.
McFarland would now have to be confirmed by the Senate for the ambassadorship.
McFarland, 65, worked as an aide on the National Security Council in the Nixon and Ford administrations, and served as a Pentagon speechwriter and spokeswoman in the Reagan administration.
McFarland's style had grated against some of the professional staff members on the National Security Council, which sees itself as apolitical.