Photo Manuel Maleki © Edmond de Rothschild

By Manuel Maleki, Ph.D., Deputy Director, Economist, United States, Commodities Edmond de Rothschild

The Democrats’ victory in the midterm elections significantly shifts the political balance in Washington, though it does not fundamentally alter the US economic outlook. By regaining control of the House of Representatives and gaining seven seats in the Senate, the Democrats now have the means to limit Donald Trump’s legislative initiatives. However, they remain far from the two-thirds majorities needed to override a presidential veto. This situation is likely to lead to more institutional gridlock rather than a genuine shift in economic policy.

A Change in political leadership with limited room for maneuvering

The new Congress, which will take office in January, will nevertheless have several tools at its disposal. In particular, the Senate will be able to influence appointments, including those of future Federal Reserve governors. On tariffs, a large portion of which falls under authority delegated to the executive branch, Congress’s room to maneuver will be more limited. ongress will be able to challenge certain decisions, but will find it difficult to force a shift in trade policy in the face of a presidential veto. American history shows that a divided government, with a president and an opposition controlled Congress, does not necessarily lead to paralysis in public policy. Between 1995 and 2000, Bill Clinton issued 37 vetoes against the Republican-controlled Congress, a period that also saw the federal budget return to balance. But economic conditions were significantly different back then. The reduction in military spending following the Cold War, control over discretionary spending, and particularly robust growth had all contributed to the improvement in public finances. Today, budgetary constraints are of a different nature.

Political gridlock does not resolve budgetary imbalances

With a federal deficit nearing $2,000 billion in 2026, about 6% of GDP, US public finances remain on a path that is difficult to sustain in the long term. The deficit is estimated to have risen by 12% year-over-year, while net interest payments on the debt now exceed $1,000 billion. Furthermore, a growing share of federal spending, particularly social benefits and interest on the debt, is beyond the scope of annual budget decisions. The new Democratic majority could thus limit further tax cuts or additional stimulus measures, without, however, having the political leverage necessary for significant fiscal consolidation. Institutional gridlock should not be confused with fiscal discipline. At the same time, the US economy continues to show remarkable resilience. Despite the oil shock, the slowdown in the labor market, and the resumption of monetary tightening, economic activity has not experienced the downturn that these various factors might have led one to anticipate. Investments in artificial intelligence and domestic demand help explain this resilience. However, this resilience has been accompanied by a renewed acceleration in inflation, which led the Federal Reserve to raise interest rates in September, for the first time since 2023, before pausing in October.

3Short-term rates sensitive to the Fed, long-term rates constrained by debt

For bond markets, this new political landscape could widen the divergence between the factors driving short-term rates and those driving long-term rates. Reduced fiscal stimulus would help moderate demand and could, over time, facilitate monetary policy easing. On the other hand, persistent high deficits, the Treasury’s growing financing needs, and the continued existence of a significant term premium could continue to weigh on the easing of long-term yields. Beyond the change in congressional control, the main question therefore remains whether the US economy can continue its disinflationary trend without compromising growth. The energy shock served as a reminder that supply constraints can quickly counteract the effects of monetary tightening, while fiscal policy continues to support economic activity despite mounting debt. Under these conditions, the Federal Reserve will retain a decisive role, even though the new Democratic majority in the Senate will now have the power to confirm its future governors. The elections have shifted the balance of power in Washington, but they have not altered the fundamental constraints on the US economy. The trajectory of inflation and the Federal Reserve’s decisions are therefore likely to have a greater impact on the economic and financial outlook than the new composition of Congress.Retrouvez l’ensemble de nos articles Strategic Case