Democrats will control both chambers of Congress after Tuesday’s midterm elections. The Associated Press reported that Republicans lost Senate seats in North Carolina, South Carolina, Texas, Ohio, Kansas and Iowa, giving Democrats a majority on a map drawn from usually Republican states; Democrats had needed a net gain of four seats to reclaim the chamber. Decision Desk HQ projected that Democrats would also win the House, where Republicans entered the election holding 219 seats to 214, with two vacancies.
The result means the final two years of the Trump administration will run under divided government. New tax or spending legislation now needs Democratic votes, which removes the tail risk that most concerned bond investors before the vote: a further round of unfunded fiscal expansion layered on deficits already running near $2 trillion a year and a national debt above $40 trillion.
The offsetting risk is procedural rather than legislative. A Democratic Congress gains the power to block funding bills and to contest the next increase in the debt ceiling, and Treasury borrowing authority is projected to expire in the second half of 2027. Pre-election investor surveys identified a debt ceiling standoff, and a bond selloff in response to one, as the election’s main market risk, and that risk now has a date attached to it rather than a scenario.
For monetary policy the election changes the backdrop rather than the path. The Federal Reserve held its target range at 3.75 to 4.00 percent on October 28 and next meets on December 8 and 9; a Congress that can neither expand nor consolidate fiscal policy leaves the inflation fight, and the level of real rates, with the central bank.