Democrats Take Congress, Putting Trump’s Fiscal Agenda to the Test

The midterm result makes further fiscal expansion harder to pass and gives Democrats more leverage over spending and appointments. For markets, the conflict with Iran could still matter more than the shift in Congress.

• Democrats secured majorities in both chambers, with 243 House seats and 54 Senate seats already projected while counting continued.
• Further Republican tax cuts and major spending initiatives face a tougher path. Democrats will also need bipartisan support for much of their own legislative agenda.
• Control of federal spending gives Democrats leverage over the administration’s priorities, including funding for military operations against Iran. A budget standoff could lead to a partial government shutdown.
• A Democratic Senate can block key presidential nominees, including candidates for the Federal Reserve Board, senior federal posts and the federal courts.
• A smaller fiscal boost could lower Treasury yields and weigh on the dollar. Renewed escalation with Iran could lift oil prices, delay Fed easing and push the dollar in the opposite direction.

The Democrats’ victory in both chambers exceeded polling expectations and changes the balance of power for the final two years of Donald Trump’s term. The new majority can set the congressional agenda, chair committees and launch investigations into the administration. It also makes it harder for the White House to secure further tax cuts or push through changes to federal benefit programmes.

The legislative constraints run both ways. Most bills still face a 60-vote threshold to end debate in the Senate, and overriding a presidential veto requires a two-thirds majority in each chamber. Democrats can use popular proposals, such as measures to expand access to healthcare, to put political pressure on the White House. Turning those proposals into law will generally require compromise.

Control of appropriations gives Democrats a direct way to influence the administration’s priorities. They can press for changes to federal spending and challenge requests for additional funding for military operations against Iran. If Congress and the White House fail to agree on a funding bill, the result could be a partial government shutdown. That gives both sides an incentive to negotiate, even as disagreements over military spending make a deal harder to reach.

Over a longer horizon, the election makes another round of fiscal stimulus less likely. That could moderate growth while easing investor concerns about federal borrowing. The effect may be most visible at the long end of the Treasury curve, where a less expansionary fiscal outlook could reduce the premium investors demand to hold longer-dated debt.

A Democratic Senate can block or delay nominees to the Federal Reserve Board, the federal courts and senior government posts. That gives Democrats a direct say in who fills future vacancies and makes it harder for Trump to reshape the Fed’s leadership. The outlook for interest rates will still depend primarily on inflation, employment and growth.

With fewer opportunities to advance his domestic agenda through Congress, Trump may turn more often to executive action and foreign policy. Democrats could seek to narrow the president’s tariff powers through legislation, though such a bill would face a potential veto. Congress also has more leverage over the financing of military operations than over the White House’s immediate decisions abroad. Renewed US and Israeli strikes on Iran remain possible, as does a tougher US stance towards Ukraine alongside an effort to improve relations with Russia.

A smaller fiscal boost could weigh on the dollar if investors respond by pricing in slower US growth and a more accommodative Fed. For Treasuries, the prospect of less fiscal expansion could reinforce the downward pressure on yields. The durability of that move, however, depends in part on energy prices.

Renewed escalation with Iran could drive oil prices higher, lift inflation expectations and push back the expected timing of Fed rate cuts. That would favour the dollar, particularly if investors also seek safety. The effect on Treasuries would be less clear, as demand for safe assets could offset some of the upward pressure on yields from higher inflation. De-escalation would ease that inflation pressure and give the Fed more room to cut if growth or employment weakens.

The election result also offers a potential source of support for the US dollar. A Democratic majority in the Senate makes it harder for President Trump to shape the Federal Reserve’s leadership. If a seat on the Board of Governors becomes vacant, his nominee would need confirmation from a Senate controlled by the opposition.

That limits the scope for politically driven appointments and could strengthen confidence in the Fed’s ability to set monetary policy independently. This could lend support to the dollar over time, even if markets initially focus on the prospect of lower Treasury yields and slower US grow.

The US dollar has weakened since the election, while gold has gained and crude oil has sold off sharply. European equities have risen, and Wall Street has reversed its initial decline. Major US indices are now trading above their pre-election levels. The rebound in equities alongside gains in gold suggests investors are weighing different factors across markets, including the outlook for US interest rates and the risk of renewed escalation with Iran.