US Midterm Elections: Democratic Control to Strengthen Congressional Checks, Raise Gridlock Risks

Democrats are expected to take control of both chambers of Congress in January 2027, potentially limiting the Trump administration's fiscal agenda while increasing legislative uncertainty and pressure on government budget negotiations.

The outcome of the 2026 US midterm elections is expected to reshape the country's legislative landscape, with Democrats set to assume control of both chambers of Congress when the new legislature takes office in January 2027. The shift will end two years of unified Republican control and introduce stronger congressional oversight of the Trump administration.

According to CareEdge Ratings' assessment dated November 5, 2026, the political transition could result in mildly expansionary fiscal policy and marginally lower inflationary risks. However, legislative gridlock, contentious budget negotiations and continued policy uncertainty could create challenges for the US credit profile.

Fiscal Expansion Likely to Remain Moderate

The US credit profile continues to face risks from persistent fiscal deterioration, which could increase government debt and interest burdens over the medium term.

Unified Republican control has so far supported the Trump administration's expansionary fiscal agenda. However, implementing further fiscal measures could become more difficult once Democrats take control of Congress.

Neither party is expected to implement its complete fiscal agenda. Additional tax cuts and the proposed increase in defence spending may become less likely, while Democratic proposals to increase taxes or reverse earlier reductions in social spending could face a presidential veto.

A negotiated fiscal programme incorporating proposals from both parties is therefore considered a more likely outcome. This could include a smaller increase in defence spending alongside some increase in social expenditure.

Budget negotiations may also become more contentious, raising the possibility of government shutdowns. These risks could intensify if funding negotiations coincide with the need to raise the debt ceiling.

Although an eventual agreement remains the most likely outcome, repeated funding disruptions and last-minute settlements could weaken fiscal governance and policy predictability.

Inflationary Pressures May Ease Marginally

Affordability emerged as a major concern among voters and is expected to remain central to the policy agenda, particularly as the next presidential election approaches.

This could encourage targeted measures aimed at reducing household costs and limiting inflationary pressures.

Congressional opposition to additional military spending related to Iran could also restrict the scale or duration of the conflict. This may ease pressure on oil prices and contribute to moderating inflation.

Lower inflationary pressures could reduce the need for further monetary tightening. However, the country's high debt burden and persistent fiscal pressures are expected to keep US Treasury yields elevated, maintaining higher government borrowing costs.

Trade Policy Likely to Remain Under Presidential Control

The change in congressional leadership is not expected to significantly alter the US tariff framework, as the President retains considerable authority under existing trade laws.

The administration may continue using tariffs as a trade policy instrument, with congressional oversight and judicial review serving as the primary constraints.

Congress is also likely to oppose a US withdrawal from the United States-Mexico-Canada Agreement (USMCA). Any unilateral presidential attempt to withdraw could face legal challenges.

The agreement may remain in place while such disputes are addressed. However, prolonged uncertainty surrounding its future could affect regional trade and investment decisions.

Stronger Congressional Oversight Could Increase Policy Uncertainty

The incoming Congress is expected to strengthen institutional checks on the executive through committee oversight, investigations and Senate authority over important appointments, including judicial and regulatory positions.

These measures could constrain executive powers and support institutional credibility.

However, divided government could also result in legislative gridlock, delays in appointments and greater reliance on executive action to advance policy priorities.

AI Infrastructure and Data Centre Investments Under Watch

Developments in artificial intelligence will also remain an important area to monitor.

Democratic gains in several state-level elections could lead to tighter permitting requirements and higher utility and cost-sharing obligations for data centres.

Such measures could increase project costs and extend development timelines, potentially moderating the pace of AI-related investment and economic growth.

US Debt Burden Continues to Pose Credit Risks

The election outcome does not resolve the underlying concerns surrounding the country's rising public debt and interest payments.

According to the assessment:

• General Government Debt: Approximately 124% of GDP in 2025.
• Interest Payments: 18.7% of government revenue.
• Fiscal Risks: Government shutdowns, debt-ceiling confrontations and legislative gridlock could weaken government effectiveness.

While stronger congressional oversight may reinforce the institutional framework, continued policy uncertainty could limit its effectiveness.

CareEdge Ratings stated that the risks underpinning its CareEdge AA+/Negative rating remain in place.

Key Factors to Monitor

Going forward, the US economic and credit outlook will depend on several developments:

1. Fiscal policy decisions and their impact on government borrowing.
2. The ability of Congress and the administration to reach agreements on budget priorities.
3. Developments surrounding government funding and debt-ceiling negotiations.
4. Changes in trade policy and the future of the USMCA.
5. Regulatory developments affecting AI infrastructure and data centre investments.

The ability of the incoming Congress and the administration to manage political differences while addressing fiscal pressures will remain an important determinant of the US credit profile.