The November midterm elections may reshape the balance of power in Washington, but they are unlikely to alter the broader macroeconomic regime. Republicans currently hold a narrow majority in the House of Representatives, while history suggests the president's party typically suffers losses in midterm elections. A Democratic takeover of the House would usher in a period of divided government, more congressional investigations and greater legislative gridlock. For investors, however, the political noise is likely to matter more than any meaningful change in policy direction.
Much of the economic agenda sits outside Congress
Regardless of the outcome, the key pillars of US policy are likely to remain largely unchanged. Trade policy, immigration enforcement and the relationship with China increasingly depend on presidential authority and executive agencies rather than congressional legislation. While Congress can challenge specific measures or constrain funding, it is unlikely to reverse the administration's broader objectives. Even after recent judicial limits on the use of certain tariff authorities, the administration quickly found alternative legal avenues to pursue its trade agenda.
The same continuity applies to China. Strategic competition now commands support across party lines. Export controls, semiconductor leadership, critical minerals, supply-chain resilience and Taiwan have become enduring elements of US policy rather than partisan issues. A shift in congressional control may change the tone of the debate or the tools being used, but not the direction of travel.
Artificial intelligence is another area where continuity should prevail. Both Republicans and Democrats increasingly view AI and advanced semiconductors as central to economic competitiveness and national security. A divided government could create space for a limited bipartisan framework around transparency, safety standards or federal oversight designed to avoid a patchwork of state regulations. But neither party appears inclined to support measures that would materially slow investment or weaken the US position relative to China.
The bond market still faces the same arithmetic
The midterms are also unlikely to alter the fiscal outlook in any meaningful way. A Democratic House could make further tax cuts more difficult, while continued Republican control would preserve a more business-friendly legislative bias. Neither scenario, however, points to a significant reduction in budget deficits.
The political constraints are well known. Entitlement spending remains largely untouchable, defence spending faces persistent geopolitical pressures, and narrow congressional majorities make ambitious fiscal reforms difficult to achieve. As a result, the trajectory of public finances is unlikely to change materially.
That leaves the fiscal outlook as the dominant driver of long-term interest rates. Deficits are expected to remain near $2 trillion annually over the next two years, while debt held by the public will continue to rise as a share of GDP. Investors increasingly require compensation not only for inflation risk, but also for growing debt issuance and uncertainty surrounding the long-term fiscal trajectory. Long-term Treasury yields therefore reflect more than expectations for Fed policy. They also incorporate concerns about debt sustainability, supply dynamics and fiscal credibility.
Warsh cannot solve a Treasury problem
Fed Chair Kevin Warsh can contribute by maintaining a credible commitment to price stability. His emphasis on the risks of persistent inflation may help anchor expectations and limit upward pressure on long-term yields. But monetary policy cannot offset a structural fiscal imbalance without risking the Fed's independence or credibility.
The Treasury Department has several tools at its disposal, including adjusting the maturity profile of its debt issuance, buyback programmes or other initiatives aimed at improving market liquidity. These measures can influence the maturity structure and functioning of the market, but they do not address the underlying deficit. If investors begin to view monetary policy as overly tolerant of inflation, or Treasury debt management as an attempt to suppress bond yields, term premia could rise further.
The division of responsibilities remains straightforward. The Federal Reserve controls inflation. Elected officials determine the fiscal path. The Treasury manages government borrowing, but it cannot dictate the price at which investors are willing to provide that funding.
The bigger issue
The most likely outcome of the 2026 midterms is macroeconomic continuity. Given the uncertainty surrounding the current administration's policy approach, that may not necessarily be reassuring. More importantly, continuity means that the fiscal challenges confronting the United States will remain unresolved.
If long-term interest rates are to stabilise without placing greater pressure on equity valuations and economic activity, some degree of fiscal consolidation will eventually be required. The scale of the adjustment is daunting. Under current assumptions for growth and public finances, stabilising debt held by the public at its current level over the coming decades would require either a 25% increase in revenues or a 20% decrease in spending programmes each year, or some combination of both.
The precise mix is open to debate, but the broader conclusion is not. The challenge facing the bond market is fundamentally fiscal rather than monetary. And the midterm elections, whatever the political outcome, are unlikely to change that reality.
