Midterm elections hold big stakes for US economy as headwinds grow

Tuesday’s midterm elections come at a crucial time for the U.S. economy as it faces an increasingly grim outlook amid stubbornly high inflation and the growing possibility of a recession this year or next.

Voters, sensing a string of consumer prices still running near 40-year highs, will cast their ballots to determine which party controls the House and Senate, and the winners will immediately face an ailing economy beset by hyperinflation. and rapidly rising interest rates.

But the next Congress, which won’t convene until January, will also have the power to shape the economy with fiscal policy.

Here’s a closer look at some of the issues experts are paying attention to as they await Tuesday’s election results.

2022 Midterm Elections: Live Updates

US midterm elections

A sign marks a polling place on Election Day on November 8, 2022 in Grand Rapids, Michigan. (Bill Pugiano/Getty Images/Getty Images)

Tax changes

Both parties are promising major tax changes if they win control of both houses of Congress.

Republican lawmakers are preparing to expand key parts of the former President Trump Tax overhaul, and President Biden intends to push through his tax-hike plan to raise taxes on corporations and wealthy Americans and implement a global minimum tax. If the GOP seizes control of the House and Senate, Biden’s plan will be stopped in its tracks.

“The prospect of significant tax legislation beyond this year depends almost entirely on election results,” said John Gimigliano, head of legislative affairs at KPMG.

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If the GOP were to take back control of both chambers of Congress, they have indicated a top economic priority would be enacting key parts of the 2017 Tax Cuts and Jobs Act. that $1.2 trillion tax overhaul — the largest since Ronald Reagan occupied the Oval Office — cut the top individual tax rate to 37% by 2025 and permanently cut the corporate tax rate from 35% to 21%.

House Minority Leader Kevin McCarthy confirmed in an interview with FOX Business’ Larry Kudlow last month that Republicans “want to lock in the tax cuts we’ve got, which we have to pass over the next two years.”

House Minority Leader Kevin McCarthy

House Minority Leader Kevin McCarthy, R-Calif., meets with former House Speaker Newt Gingrich and former Trump White House adviser Kellyanne Conway on September 22, 2022 in Washington, DC. (Jabin Botsford/The Washington Post via Getty Images/Getty Images)

Still, unless Republicans win a 60-plus seat majority in the Senate — an unlikely event — they will need to recruit more Democrats to pass the measure to avoid a filibuster and force President Biden’s hand.

Loan limit

Congress needs to raise or suspend the federal borrowing limit at some point in 2023 to avoid defaulting on the national debt for the first time.

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The US Treasury is expected to reach its mandatory $31.4 trillion borrowing limit sometime next year; If Republicans win control of either chamber of Congress, they could use the debt ceiling as an opportunity to block spending initiatives from Biden and Democrats.

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Still, it’s possible that Republicans and Democrats work together on a bipartisan bill to avert a shutdown and raise the debt limit.

US Capitol Building

The US Capitol building is seen on the evening of August 6, 2022 in Washington, DC. (Anna Rose Leyden/Getty Images/Getty Images)

“We know that neither party wants to shut down the government in December, so there has to be a current bill with funding in it,” said Gimigliano, a former GOP House aide.

Federal Reserve

The Federal Reserve has largely acted with impunity this year as it raises interest rates at its fastest pace in decades, but could face more scrutiny from lawmakers next year as it struggles to contain runaway inflation.

Sen. Elizabeth Warren, D-Mass. Democrats, led by , have already raised concerns about higher interest rates, warning of imminent job losses as a result of tighter monetary policy.

“We are writing to express concern and request more information about the Federal Reserve’s (Fed) recent economic projections, its intention to continue raising interest rates at an alarming pace, and the alarming warning to American families that they should expect pain in the coming months,” the Democratic lawmakers said. Wrote a letter to Chairman Jerome Powell last week.

Voters head to the polls as painfully high inflation weighs on Americans

Federal Reserve Chairman Jerome Powell

U.S. Federal Reserve Chairman Jerome Powell speaks during a news conference on interest rates, the economy and monetary policy actions at the Federal Reserve Building in Washington, DC, June 15, 2022. (OLIVIER DOULIERY/AFP via Getty Images / Getty Images)

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Republicans are also stepping up their criticism of the U.S. central bank: Sen. Pat Toomey, R-Pa., last week urged Powell to refrain from buying government bonds if markets weaken.

With inflation at a 40-year high and the economy teetering on the brink of recession, lawmakers on both sides of the political aisle expect increased Fed surveillance.

American recession

The Fed has raised interest rates six times in a row this year, keeping the benchmark federal funds rate in the restricted zone. Policy makers have shown no signs of slowing down to keep inflation in check.

But the rapid tightening of monetary policy has fueled fears that the U.S. could slip into recession. Most economists are preparing for a recession in late 2022 or early 2023.

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Should Democrats retain control of the House and Senate, expect a recessionary response that includes more spending initiatives at the federal level, such as stimulus checks or other forms of financial aid, according to Goldman Sachs economists. On the other hand, if Republicans take control, they will be more likely to avoid costly relief packages.

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