With expectations that the House will go to the Republicans and the Senate to the Democrats, gridlock is likely to ensue.
A despondent Democratic campaign going into the mid-term elections in the US now must see the party collectively breathing a lot easier. The much written about red wave failed to materialise, more a medium ripple. Expectations are that the House of Representatives will go to the Republicans but the Senate will just cling onto a Democratic majority with Vice President Kamala Harris being the deciding vote caster. So a sense of gridlock in US politics that we have become much used to, with President Biden’s policies effectively hamstrung for the next few years. Normally in years gone by, a gridlocked US legislative branch is positive to risk assets as it removes many layers of uncertainty – nothing is as certain as nothing happening on the political front. However, that was without the looming threat of a slowdown/recession and all eyes will once again refocus on Federal Reserve (Fed) policy. A good level of stimulus will be erased with many of Biden’s future proposals now being effectively blocked by the GOP and this will undoubtedly be deflationary so it makes the case for a more dovish Fed slightly easier. However, that is months away still and the all-important CPI inflation data tomorrow will not factor any of these political mid-term ripples.
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