High inflation may sap support for Democrats, making policy-making more complicated.
Thomas Costerg, Senior US Economist Pictet Wealth Management.
- Current polling suggests the Democratic party could lose its House of Representatives majority in Congress in the November mid-term elections.
- High inflation is a millstone around the neck of Democrats, especially as incomes have not caught up with price increases.
- A gridlocked Congress could complicate policy responses and delay much-needed support in the case of a hard recession (not our main scenario).
- The elevated political polarisation in the US could mean more battles around debt-ceiling deadlines and federal budget rollovers if the Republicans re-take the House.
- The Federal Reserve is likely to keep tightening monetary policy after the midterms as it continues to focus on stubborn core CPI inflation and resilient employment growth. The risk of a policy error is high given the lagged effect of interest-rate increases on GDP growth as well as the evaporation of market liquidity due, in part, to quantitative tightening (QT).y
- Historically, equity markets tend to see a midterm boost after the elections. But this effect fades if one looks in isolation at election periods when the Fed is in rate-hiking mode.