Midterm and your money: what a divided government means for the US economy

This year’s economic crisis – the highest inflation in 40 years, a bear market and backward wages – played into voters’ choices as they headed to vote on Tuesday. Experts say the result is likely to be a divided government, which could affect everything from the stock market to the federal government’s ability to respond to a recession next year.

when mid term election With the results still being resolved as of Wednesday afternoon amid several close races, the balance of power in Washington, D.C., is likely to be split between Democrats and Republicans, with the GOP. presumption of control Of home control of the senate toss-up stays Since each party has secured 48 seats as of Wednesday morning, four races still have to be called, CBS News projects.

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A divided government, with Republicans in control of at least one chamber of Congress and a Democrat in the White House, could face challenges in the next two years. Among them is the risk of drama over debt limits, with Republicans indicating they plan to use their House control as a negotiating tool with President Biden to rein in government spending. And Mr Biden could have more difficulty passing major legislation going forward.

“A narrow Republican victory in the House would end President Joe Biden’s domestic agenda and the possibility of further major changes to fiscal policy,” Andrew Hunter, senior US economist at Capital Economics, said in a research note. “It would also increase the risk of another crisis on the federal loan limit next summer.”

What if there is a recession?

The US economy has so far managed to avoid recession. but economists warn That the country could plunge into recession in 2023 could put millions of jobs at risk as businesses cut spending to cope with the economic downturn.

A divided government would make it harder for Biden to pass legislation to counter the effects of the recession, especially as Republicans have blamed his administration’s spending for the highest inflation since the early 1980s.

Goldman Sachs analyst Alec Phillips said, “While a legislative response to a potential recession will be even more difficult, we believe the House and Senate will follow different approaches and the likelihood of gridlock will be somewhat higher.” ” in a report on Wednesday.

This can hamper the government’s ability to provide relief to workers in the face of recessions, such as George W. Bush’s Economic Stimulus Act of 2008, which sent stimulus checks in the wake of the Great Recession.

US economy grows but fears of recession remain


In other words, if a recession strikes in 2023, the Republican-controlled House could oppose proposals such as additional unemployment aid or stimulus payments, in keeping with the GOP’s desire to rein in spending and reduce inflation. .

But a more immediate concern could be the country’s historically elevated inflation rate, which is slashing the household budget and causing market turmoil. In this case, Federal Reserve policies are more important to investors than election results, Wall Street analysts note.

The Fed, which makes its decisions independently of the White House and Congress, is on a campaign to reduce inflation through a series of interest rate hikes. It is unlikely to be influenced by the election, with central bank officials scrutinizing economic trends such as inflation data and job growth to set their agenda instead of elections.

How will the stock market react?

Historically, the stock market has performed well in the post-midterm period and even when government controls are split between parties, say experts.

According to Barry Gilbert and Jeffrey Buchbinder of LPL Financial, the market has rallied after the last 18 mid-terms – going back to 1950. Investors may be cheering the end of uncertainty around the mid-term, or are showing their anticipation of balanced policy priorities when the parties are sharing power.

Of course, past performance is no guarantee of future results, as the saying goes, and the market has plenty of odds to contend with.

,[T]Markets in their time may behave differently given a mix of historically high inflation, global geopolitical tensions and a hard-hitting pandemic, but, looking at the market already in the past months, the overall result is positive. Can continue on the side. , said Guido Petrelli, founder and CEO of Merlin Investor, in an email.

So far in 2022, the S&P 500 has lost 21% of its value, affecting employees and retirees alike.

Another debt ceiling drama?

One issue that could arise next year as a result of a split government: more drama on the debt ceiling. It refers to the maximum amount that the US is allowed to borrow to pay off its debts. If the amount of government debt reaches that limit but does not raise the limit, the US will be unable to pay what it owes and may default.

This issue may come to the center next year as the country’s gross national debt in October exceeded $31 trillionClose to the statutory limit of about $31.4 trillion.

Ahead of the midterm, House Republicans clarified that if they are successful in winning control in the midterm, they could use the debt limit as a Negotiation Tools with Mr. Biden, In other words, if the president does not agree with their demands to control government spending, he can refuse to raise the debt limit.

This has happened in the past under a divided government. “In 2011 and 2013 under a Republican House and Democratic Senate, debt-limit uncertainty disrupted financial markets and led to substantial spending cuts,” Goldman Sachs noted.

Impact on older Americans?

Part of the spending cuts that Republicans are pushing are overhauling the nation’s aging programs — Social Security and Medicare.

Some Republican lawmakers have proposed change social security Discretionary from a mandatory spending program would require Congress to approve funding each year.

House Republicans, meanwhile, want Increase eligibility age for seniors Age 70 to claim both Social Security and Medicare benefits. The reason for this, he says, is to align the program with benefits in longevity, as well as reduce the cost of programs to cut the number of years that seniors can use these benefits.

Currently, Americans can Sign up for MedicareGovernment health care program for senior citizens when they turn 65. Under the scheme, senior citizens will have to wait till the age of 70 to access the programme. And the retirement age for Social Security will also increase to 70, while today’s full retirement age is between 66 and 67 years old.

Experts say this could result in increased poverty for seniors, as well as higher health care spending for people between 65 and 70 who would drop out of Medicare.

If there’s a positive comment about retirement, it’s in the potential. SAFE ACT 2.0 According to Wells Fargo analysts, to move forward. The law is intended to boost Americans’ retirement preparedness, and comes as nearly half of older workers have no retirement savings.

He noted in a recent report that the bill would “expand retirement-savings tax breaks primarily by easing restrictions on required minimum distributions and facilitating small business sign-ups.”

Wells Fargo said that if the bill does not pass in the current lame-duck Congress, it could be taken up and passed in 2023, as it has the support of both parties.

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