US Election Results Put Inflation, Deficits and Economic Growth in Focus

Voters have sent a strong election-year message to the new Democratic congressional majority and President Donald Trump: Repair the damage inflation has done to theeconomy.

Trump, who campaigned on the idea that a Democratic victory in the midterms would trigger a 1929-style economic depression, has maintained that the economy is booming. Since his party lost in Tuesday’s voting, he has claimed he is willing to work with Democrats in the House and Senate, though that’s not something he has done much of in the past.

“I’ll get along, probably, with the Democrats, unless they want to be destructive,” Trump told reporters last week.

After Friday’s strong jobs report showed employers adding 165,000 jobs and the unemployment rate dipping to 4.1%, Trump was defiant. “Democrats may control Congress, but I will NEVER stop fighting for you, and I will VETO anything that hurts America,” he said in a text message to his supporters. Democrats are seeking to check Trump’s power and are preparing for early fights on government spending. 

Other challenges include chronic budget deficits, tariffs, artificial intelligence and difficult choices about a Social Security system that could run short of money in as little as six years.

But as long as rising prices keep making middle-class lives less affordable, Democrats and Republicans alike face the risk of angering and alienating voters in the next election cycle.

“Until inflation and interest rates are under control, the likelihood of change elections is going to be high on an ongoing basis,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. Trump’s tariffs and the war against Iran that he launched in February contributed to the consumer price index climbing to 3.7% annually. The president also tried to bully the Federal Reserve, an independent body tasked with keeping inflation low, to slash its benchmark interest rate in ways that could have worsened inflation.

The gridlock of a Republican White House and Democratic Congress gives the Fed more room to maneuver, possibly smoothing the central bank’s ability to return inflation to the 2% target it has failed to reach for nearly six years.

“I think that one of the surprise winners Tuesday was the Fed,” said Douglas Holtz-Eakin, an economist and president of the center-right American Action Forum.

The Democratic Senate could block Trump’s ability to fill potentially open spots on the Fed board, Holtz-Eakin said, removing “Trump’s incentives to meddle with the Fed” and clearing a path for Fed Chair Kevin Warsh “to follow his instincts and aggressively reduce inflation.” Trump has maintained that the costs of oil, gasoline and diesel will all plummet once the Iran war ends. The problem is he refuses to say when or how the war will come to a conclusion.

John Cochrane, an economist at Stanford University’s Hoover Institution, stressed that the Fed’s efforts to combat inflation would be helped if the federal government reduced budget deficits.

“It takes monetary and fiscal restraint,” he said. The U.S. government keeps amassing debt as tax revenues fall short of burgeoning spending on Medicare, Medicaid, Social Security and other programs. Paying the interest on the national debt now tops $1 trillion annually and exceeds spending on the military. The problem could spiral because investors have pushed up the interest rates charged on government debt over the past year.

Neither the White House nor Democrats ran on spending cuts. The president wants an additional $500 billion a year for the military, while some Democratic candidates have pushed for restoring Affordable Care Act subsidies that lapsed under Trump.

Since August, Treasury Secretary Scott Bessent has repeatedly said the administration would put forward a plan to trim the roughly $2 trillion annual budget deficit. Bessent is working with White House budget director Russell Vought on cuts they’re branding as a “fiscal consolidation plan,” to be released after the election. Deficit reduction would likely require some combination of tax increases and spending cuts, Goldwein said. But he said that the lowest hanging fruit would be to trim Medicare expenditures in ways that save money for both the government and patients.

“It’s not rocket science,” he said. “The most important thing you can do is reduce healthcare costs and find policies that lower the costs of Medicare, which will reduce deficits and interest rates.” When Harvard University economist Jason Furman thinks about the most important economic issues facing the United States,