Former President Donald Trump won a decisive victory in the U.S. election on November 5, becoming just the second president ever to be elected to non-consecutive terms. Trump won the battleground states of Georgia, Michigan, North Carolina, Pennsylvania and Wisconsin and appeared poised to add Arizona and Nevada to that list as vote counting continued on November 11.
Republicans also captured the majority in the Senate, as expected. Republicans needed to flip just two Senate seats to win the majority; they flipped four by winning seats in Arizona, Montana, Ohio and West Virginia. Republicans will have a 53-47 majority when the new Congress convenes in January.
The battle for the House of Representatives remained uncalled as of midmorning on November 11. A handful of key races in California and other western states that are likely to decide the final margin could take several more days to determine a winner. While there is still the narrowest of paths for Democrats to capture the House majority, it appears likely that Republicans will emerge with a narrow margin of one to five seats. That would ensure a unified government, giving Republicans the ability to push through many of Trump’s policy priorities, though lawmakers on Capitol Hill will inevitably make changes to his campaign proposals.
The new Congress will face two complex policy issues in 2025 that are critical to the markets: a debt ceiling fight and major tax legislation.
Debt ceiling
The debt ceiling, the congressionally mandated cap on the total amount of debt the United States can accumulate, has been suspended since mid-2023, part of a deal struck in the last debt ceiling fight on Capitol Hill. The cap returns in January 2025. At that point, the U.S. will be unable to accumulate more debt. The Treasury Department can take what it calls "extraordinary measures" to ensure the United States does not default, but those steps are temporary. By mid-2025, Congress will have to vote to raise the ceiling, a vote that will be politically tricky regardless of the configuration in Washington. Republicans will likely want to pair any increase with spending cuts. But voting to raise the debt ceiling will draw attention to the estimated $1.8 trillion budget deficit and more than $35 trillion in debt.
Taxes
Expect Republicans to move quickly in 2025 to extend or make permanent the provisions of the 2017 tax cuts that are set to expire at the end of next year, including the lower individual income tax rates and the higher amount of assets that can be inherited without triggering the estate tax. Trump has also talked on the campaign trail about lowering the corporate tax rate, repealing the deduction cap for state and local taxes, and ending the taxation of tip income, Social Security benefits and overtime pay, among other ideas. It's unclear how many of these proposals will be added to the tax package next year.
If Republicans hold on to the House majority, they could use a parliamentary process known as "budget reconciliation," which allows for tax code changes to be passed with a simple majority in both chambers, bypassing the need for a 60-vote supermajority in the Senate. That could mean the tax issue is resolved in the first half of 2025, though changes would not take effect until 2026. If Democrats win the House, the policy debate over taxes becomes much more complicated.
Other policy issues to watch
- Tariffs: Trump's plan for across-the-board tariffs on imports will be a key issue of interest for the markets, as they pose potential downside risk to economic and earnings growth while also being likely to increase inflation. But it may be that some of his tariff threats are negotiating tools to forge agreements with China and other countries. When it comes to tariffs, the specifics are important. The amount of the tariffs, which imports they apply to, the countries targeted and how those countries respond—all will be critical factors in what the broader economic impact will be. Uncertainty about tariffs will be an issue for companies between now and Inauguration Day in January 2025.
- Deregulation: Unified Republican control in Washington likely ushers in a "light-touch" regulatory environment in areas like the capital markets, banking, cryptocurrency and elsewhere. But a Supreme Court decision last summer gives courts a much larger role in the regulatory process, and it will likely take a year or more for the implications of that to be fully understood.
- Federal Reserve: Trump has talked on the campaign trail about wanting a larger role for the president in monetary policy decision-making. Markets will be watching carefully to see what, if any, steps are taken to weaken the Fed's independence. None of the Fed governors have a term ending before May 2026, when Jerome Powell's term as chair is set to expire, so making any changes to personnel before then (barring a resignation of a sitting Fed governor) likely raises complicated legal question
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