How we got here
The first half of President Donald Trump’s second term in office can be summarized by what we’ll call the “three I's”: Inconsistency, inflation, and instability. The resurgence of inflationary pressures resulted in a substantial rise in the cost of living and increased volatility in the macroeconomic cycle, while the measures implemented and decisions taken to combat inflation were inconsistent. On average, economic growth observed during the first part of Trump’s second term is 0.2 percentage points lower than that recorded during the Biden era. Trump’s regular U-turns on policy have also reduced investor visibility into the economic and financial climate.
Voters appear to have become weary of this approach. While the scale of the blue wave took many by surprise, it was in many cases a vote against Trump and his administration. While control of the House of Representatives has generally changed hands during the midterms, it’s less common for the Senate's party control to shift during a president’s term. The Democrats won both chambers, flipping at least 31 seats in the House and 7 seats in the Senate, securing a majority even as some races remain to be called. This is one of the biggest electoral setbacks for the Republicans in more than 30 years. For now, the markets are still digesting what this change in leadership will mean.
What changes now
The Democrat landslide will drastically reduce Trump’s scope for policy action. Without a Republican majority in the legislature, his role is now largely limited to matters relating to trade and foreign policy. He will also still be able to use his veto power to oppose proposed bills. However, extensive use of this power could damage American democracy and the Republican Party positioning for 2028.
While they will control both chambers of Congress, Democrats will not have the qualified majority (two-thirds of votes) needed to pass legislation over the presidential veto, which means they will likely need to push for consensus-based legislation, especially with a view to their own 2028 presidential election positioning. That said, the Democrats, bolstered by their majority, will likely seek to alter the direction of finance bills by scaling back tax cuts — though no changes can be made to measures already passed — in favor of increased transfer payments such as Social Security and unemployment benefits.
Democrats and Republicans also appear to disagree over issues relating to data centers and the resources they consume. As with customs tariffs, we believe that competition with China is a matter of national interest and that the rollout of data centers will continue, albeit perhaps at a slower pace.
What to watch
In the short term, the election is not expected to have any significant macroeconomic impact. The outgoing Congress's term ends January 3, 2027. Therefore, it is the existing Congress, with its Republican majority, that will debate the budget between now and the stopgap funding expiration on December 11. Obstruction by the Democrats is possible in this context, raising the prospect of a government shutdown or temporary funding in the form of another continuing resolution, which would pave the way for the new Congress to vote on the budget.
Difficulties are likely to arise during discussions on the debt ceiling and finance bills in 2027 and 2028. 60 votes in favor are required to pass the budget, and the Democrats are currently expected to hold only 54 seats. The question of whether a permanent compromise can be reached therefore remains entirely open.
The Senate’s power of appointment will also reshuffle the deck for the position of Vice Chair of the Federal Reserve, as well as for the reassignment of Jerome Powell’s seat on the Board of Governors in early 2028.
