Lame duck Trump faces economic hurdles

The US Federal Reserve raised interest rates on Tuesday, defying President Donald Trump’s calls for cheaper borrowing. This move came as investors adjusted to the political reality following the November midterm elections. Democrats captured control of both the House of Representatives and the Senate. This shift removes the president’s ability to easily push through new domestic legislation for the final two years of his term.

Market reactions were mixed in early trading across Asia. Initial declines gave way to a rally as traders processed the results. Holger Schmieding, chief economist at Berenberg, noted that voters rejected Trump’s approach. He described the outcome as proof that US institutions and checks and balances are functioning. Investors now focus on how a divided government will handle fiscal policy and external threats.

Inflation remains the central economic concern. The headline inflation rate in the US has risen to 3.7%. This spike follows a surge in diesel prices that hit a record high in August. The primary driver is the US-Israeli invasion of Iran. The conflict led to the closure of the strait of Hormuz, a critical route for global energy shipments. Brent crude oil prices remain above $100 per barrel. This is well above the prewar level of roughly $70.

The International Monetary Fund projects global headline inflation will reach 4.7% this year. Countries that import energy face the steepest price increases. The Fed’s rate hike is one of the first since 2023. Analysts expect at least one more increase from the US central bank. The Bank of England and the European Central Bank are also expected to raise rates this week. These moves aim to curb price growth despite the political uncertainty in Washington.

The loss of congressional control creates immediate administrative hurdles for the White House. Republicans no longer hold the majority needed to confirm new appointments to key bodies. This includes seats on the Federal Reserve board. Trump can still use his veto power, but Congress can override him if two-thirds of both chambers agree. The first major test of this gridlock occurs on 11 December. Lawmakers must then authorize government spending to prevent a shutdown.

The political dynamic may limit the president’s ability to launch new tax or spending measures. This restriction cuts both ways for the economy. It reduces the capacity for fiscal stimulus to boost growth. At the same time, it limits the potential for a further rise in government borrowing and debt. Analysts suggest that the midterm defeats for Trump-aligned candidates could weaken his authority. This may encourage more cooperation between the two parties in Congress.

Global growth faces risks from both trade policy and the Middle East conflict. The International Monetary Fund forecast US growth to stay stable at 2.3% for this year and the next. However, Berenberg analysts see a different path forward. They predict US growth could slow to about 1.5% in 2028. This slowdown would result from political gridlock, a pause in artificial intelligence investment, and restrictions on immigration. As a result, the US would contribute less to global economic expansion than previously projected.