Democrats have swept to control of both houses of the US Congress in a decisive midterm election result that will reshape the final two years of President Donald Trump’s term.
The party secured control of the House and retook the Senate after making gains well beyond traditional battlegrounds. The Associated Press reported Democratic Senate victories in states including Texas, South Carolina and Ohio, while the party also picked up House seats across several states that Trump carried in 2024.
The result ends unified Republican control of Washington and will usher in divided government when the new Congress takes office in January. AP voter polling pointed to frustration over high prices, the Iran war and the direction of the country as important factors in the result.
For Australia, the significance may lie less in the mechanics of US politics than in what the result means for economic policy.
Commonwealth Bank analysis suggests Democratic control of Congress will make it harder for the Trump administration to pursue major new spending and other legislative priorities. But it could also encourage greater use of presidential powers in areas such as tariffs, sanctions, export controls and foreign policy.
What does the result mean for US economic policy?
CBA Senior Geo-Economics Analyst Madison Cartwright said the change in control should not necessarily be read as a return to calmer policymaking.
“Divided government reduces domestic fiscal risk while increasing policy risk,” Cartwright said.
“Markets and businesses should not equate congressional gridlock with policy calm. Policy is likely to become less predictable rather than more moderate.”
Democrats will gain control of the legislative agenda and congressional committees, giving them greater ability to block legislation, scrutinise the administration and constrain spending at the margin.
But their ability to reverse existing tax settings or force through major new programs remains limited because Trump retains presidential veto powers.
Cartwright said the scale of the defeat was also likely to weaken Trump’s influence within the Republican Party, giving politicians facing re-election in 2028 greater incentive to distance themselves from unpopular policies.
Could tariffs and trade become more important?
While Congress can restrict the administration’s domestic legislative agenda, some of the areas with the greatest international impact rely more heavily on presidential authority.
Cartwright said Trump was likely to look for policy wins in “areas where presidential authority is greatest”, including foreign policy, security, tariffs, sanctions and export controls.
That makes trade policy particularly relevant for Australia.
Australia’s direct exposure to US tariffs has so far been relatively contained. Earlier this year, CBA economists said changes to US tariff arrangements were not expected to materially alter the near-term outlook for Australian exports to the US.
But Australia is also exposed indirectly through its links to the global economy and major trading partners, including China.
Any shift in US tariffs, export controls or wider trade policy could therefore matter beyond the direct treatment of Australian exports.
The midterm result doesn’t itself signal a new round of tariffs, but CBA’s analysis suggests trade is one of the areas where the White House retains greater freedom to act despite losing control of Congress.
Why did bond markets react?
Financial markets reacted quickly as the scale of the Democratic victory became clear.
US government bonds rallied, with Treasury yields falling about 7 to 8 basis points across the yield curve as investors priced in greater constraints on the White House’s ability to make large fiscal changes.
In their 4 November market note, CBA Head of Market Strategy and Rates Research Adam Donaldson and the rates team said the basic market logic was that a split Congress and White House should constrain efforts by the president to make sweeping policy changes.
But they also cautioned against reading too much into the first move.
“The reaction on the day is always a little knee-jerk,” the team wrote.
The longer-term picture remains more complicated. The US still faces substantial budget deficits and borrowing requirements, while the composition of government spending and future Treasury bond issuance will continue to influence yields.
Those developments matter for Australia because US Treasury yields are an important global benchmark and can flow through to Australian financial markets and borrowing costs.
Australian government bonds also rallied following the US election, although CBA’s rates team said domestic factors, including this week’s Reserve Bank of Australia decision, were also influencing the market.
Donaldson has previously described the broader shift in bond markets as much bigger than normal day-to-day volatility.
“What you're seeing is a change, a structural change that's occurred over a number of years, but a 30-year period where yields and interest rates were falling is now being reversed,” Donaldson said in a recent CommBank View interview.
Will divided government mean less uncertainty?
Not necessarily.
Democratic control of congressional committees is expected to bring greater scrutiny of the administration, while legislative clashes between Congress and the White House are likely.
Cartwright said the administration may respond by concentrating on areas where the president has greater room to act without Congress.
That combination could leave US policymaking more fragmented and less predictable even as the scope for major new spending is reduced.
For Australia, the immediate impact is already being seen in global bond markets. Over the next two years, US decisions on trade, tariffs, sanctions and foreign policy could prove more important for the Australian economic outlook.
The midterms have put new constraints on the White House. The question for the global economy is where the administration turns next.
- with The Associated Press via AAP.
