The Democrats scored a resounding victory in the midterms and there is hope that it could turn the tide on the war in Iran, tech dominance and tariffs.
- Control of Congress may act as a curb on the worst instincts of the President
- The Democrats may have enough power to usher in greater fiscal responsibility
- The AI trade has continued to wobble in the wake of the Democrats’ victory
It was a grim night for the Republicans. While Donald Trump may not want to admit it, it was a damning repudiation of the policies the administration has pursued over the last two years. However, while the US electorate has made its feelings clear, can it really make any difference in the final two years of the Trump presidency?
The optimistic take is that Democratic control of Congress can act as a curb on the worst instincts of the President. There were ‘cartwheels’ from Ontario premier Doug Ford, as he hoped for stronger leverage over Trump’s damaging tariffs on Canada. The oil price dropped as investors started to factor in cessation of hostilities in Iran. US bond yields dropped as investors hoped the Democrats might take a more responsible approach to the deficit.
There is some logic to this interpretation. The Democrats may just have enough power to usher in greater fiscal responsibility. Reto Cueni, chief economist at Syz Group, says: “With Democrats controlling Congress and President Trump having his veto power, the chances of another significant tax-cut or spending package fall considerably.” That would be good for inflation, rates and, by extension, household purchasing power.
Greater Democrat control over the purse strings may also curb Trump’s ambitions for foreign entanglements. Congress may not pass spending packages to support wars, particularly wars in which they have had no say.
While markets have been solid, the AI trade has continued to wobble in the wake of the Democrat victory. Cueni says: “Democratic victories in key data-centre states, notably Texas, Georgia and Ohio, could lead to tighter permitting requirements and higher development costs.” Americans have made it clear that they have no love for data centres, and some Democrats were elected on restricting their growth. Expect stricter rules on data-centre construction and a possible review of tax incentives.
A more worrying scenario is an irritable and humiliated president, who seeks to spend his last two years enriching himself and his family, pursuing a chaotic and damaging foreign policy, and inflicting damage on those who he believes have wronged him. Congress can provide curbs, but it cannot work miracles. The President still has significant powers – through his veto and through his executive orders – to wreak havoc.
Equally, the Democrats may choose to spend all their time on corruption allegations and impeachment rather than focusing on unwinding some of Trump’s most damaging policies. US political direction may change, but it is not inevitable.
