What could Congress, House midterm elections mean for American economy?

Tuesday’s midterm elections coincide with turbulent economic weakness in the United States amid accelerating recession-linked predictions as well as ongoing yield curve inversion. The results of Tuesday’s election will determine the makeup of a Congressional body that holds the powers to direct, guide and enact policies that will basically change the US broader fiscal landscape. There are several issues that investors will pay particular attention to as they digest election results.

Federal Debt Ceiling

The debt ceiling was last lifted in December 2021 and could be hit by the Treasury next year. It will need to be raised again in order to ensure that America can borrow the money needed to run government and ensure smooth operation of the market for US Treasuries, totaling roughly $24 trillion.

The fight between Democrats and Republicans about debt ceiling witnesses Republicans as asking for steep spending cuts in exchange for boosting the ceiling.

Spending

Democrats indicated that they focus on parts of the fiscal agenda proposed by President Biden in 2021 that have not yet become law, including expanding health coverage and child care tax credits. A Republican win or gridlock could table that. Goldman Sachs economists note that a Democratic victory could likely increase the federal fiscal response in the event of recession, while Republicans would be more likely to avoid costly relief packages.

The Federal Reserve

Lawmakers are speaking out against the pace of the Fed’s interest rate hiking to fight inflation. Democratic Senators Elizabeth Warren, alongside Banking Chair Sherrod Brown, John Hickenlooper and others have called on Fed Chair Jerome Powell to slow the pace of hikes.

Republicans are getting involved. Senator Pat Toomey, the top Republican on the Banking Committee, asked Powell last week to resist buying government debt if market conditions remain subdued. Expect more scrutiny from both parties after the elections.

Taxes

Last week, President Joe Biden suggested he may impose a windfall tax on Big Oil companies after they recorded record profits on high gas prices. Republicans would be less likely to approve that windfall tax on oil company profits and also are generally not in favor of tax hikes on the wealthy, reports my colleague Paul R. La Monica.

If Republicans do take control of Congress, it would be difficult to enact any major tax reductions without some backing from Democrats or President Biden, meaning there could be grandstanding without much action.