Decades ago, Bill Clinton's political advisor James Carvill said that when it comes to elections, 'the economy is everything.' The victory of the Democratic Party in last week's elections in California, New York, New Jersey, and Virginia shows that Carvill's adage remains as true as ever. General dissatisfaction with the state of the economy, and rising prices in particular, played a major role in the Democratic Party's success. This does not bode well for Republicans in the upcoming midterm elections of 2026, especially given that several factors are already casting a shadow on the economic outlook for 2026.
The starting point is an excessive mix of fiscal and monetary policy, which is likely to keep uncomfortably high price inflation, leading to an increase in long-term interest rates, including, in particular, mortgage rates. This should be a source of great concern for Republican candidates in 2026, as polls indicate that rising prices and the inability to buy homes seem to be at the top of voters' concerns, as was the case in the 2024 presidential elections.
National Debt
According to the IMF, the U.S. budget deficit is likely to remain at around 7% of GDP for the next few years, which will keep the already high U.S. national debt on a clearly unsustainable path. At the same time, it appears that President Donald Trump is determined to undermine the independence of the Federal Reserve (the central bank) by changing the composition of its board of governors and appointing a more dovish monetary policy figure to replace Jerome Powell when his term ends next May.
Trump has not hidden his desire for the 'Fed' to cut interest rates by as much as three percentage points, and he wants to do this even as inflation levels already exceed the Fed's 2% target. The tariff increases imposed by Trump are likely to push inflation above its current 3% level.
Foreign Holders
One of the main weaknesses of the U.S. economy is its reliance on foreign entities to finance its budget and trade deficits. In fact, foreign investors currently hold about 30% of U.S. Treasury securities, valued at $29 trillion, and a stock market and credit bubble burst, caused by artificial intelligence, could be another economic worry for Trump in the period leading up to the midterm elections.
With the large and unusual budget deficit faced by the Trump administration and the attacks on the independence of the Federal Reserve, foreign investors may begin to fear that the United States will try to get rid of its debt problem through inflation. If that happens, foreigners may become more reluctant to buy U.S. Treasury securities, which in turn could cause the dollar to fall and the 10-year Treasury yield—a very important interest rate that determines mortgage rates—to rise.
From 'The National Interest'
• One of the main weaknesses of the U.S. economy is its reliance on foreign entities to finance its budget and trade deficits. • Polls showed that rising prices and the inability to buy homes are at the top of Republican voters' concerns.
