A potentially divided US government is locked in tough economic debates for 2023

Tuesday’s election results remain uncertain, with President Joe Biden’s Democratic Party doing better than expected and possibly retaining control of the Senate.

The Republican Party was likely to win a majority in the House of Representatives, and if it did, it would likely complicate and weaken Biden’s economic plans for his second two years in office — a period in which the economy is likely to continue to grapple with inflation. Shock, it will adjust to higher interest rates imposed by the Federal Reserve to control it.

The deadlock is sometimes viewed favorably by markets and the private sector because it limits the ability of both sides to make disruptive changes to taxes, laws and regulations.

But it can also hinder basic governance and thus bring its own risks.

For example, Congress will have to raise the US debt ceiling, perhaps next year, but perhaps not until the fall. Depending on the election results and the size of the Republican majority in the House, this could disrupt the economy at a time when Federal Reserve rates are still at their peak.

Under President Barack Obama, the Republican Party used debt ceiling talks to force cuts in federal spending when the economy was still slowing after the deep recession of 2007 to 2009.

“A similar scenario could happen next year,” Goldman Sachs analysts wrote in an election publication weighing the odds in favor of Republican control of the House.

US stock markets fell on Wednesday, with major indexes down more than one percent in the early afternoon.

See also  Sunday IMF Board Meeting on Eminent Woman Georgieva

It’s the economy

In the lead-up to Tuesday’s vote, voters were primarily concerned with economic issues, with the pain in their pockets from rising inflation and high federal interest rates overshadowed by low unemployment, steady growth of jobs and wealth. Households and bank accounts still plentiful as a result of fiscal spending during the pandemic.

In the end, voters punished the incumbent Democrat with less than pre-election polls suggested, even after Republicans used the final weeks of the campaign to highlight rising food and gas prices.

However, the political and economic battle over inflation continues, with a critical period ahead when the pace of rate increases will slow or the Federal Reserve will find it necessary to raise interest rates higher than is currently expected, as a new blow to the economy.

“To realign supply and demand, we may need to do more, which poses a risk to the economy in general,” Thomas Barkin, chairman of the Richmond Fed, said Wednesday.

In a recent Fed survey of bank borrowers, more than 57% of respondents estimated the probability of a recession in the next 12 months at 60% or more, although it was also expected to be mild or moderate in nature.

Unless inflation takes a sharp dip unexpectedly, the United States may be faced with persistently high prices, high interest rates and output deflation – stagflation.

Thus, fiscal policy remains the main driver of any recession response, with decision-making hampered by divided governance and the onset of what could become a biased presidential election cycle.

The US response to the pandemic recession in 2020, initially under Republican President Donald Trump and the Democratic Congress and then later under Biden, was in some ways a textbook — with the rapid spread of a vast safety net that begs some questions other than how he prevented the Second Great Depression.

See also  Shell moves its headquarters to the United Kingdom, and becomes British

But it could also have fueled the current round of inflation and pushed US debt to record levels.

That could mean a more cautious fiscal response to the next recession.

“We continue to believe that a divided government in 2023 will underline the shift from fiscal tailwinds to headwinds, potentially leading to a lack of fiscal support amid our projected recession,” Nomura analysts wrote.

Leave a Reply

Your email address will not be published.