Upbeat on growth but election dramas loom: 3 calls for the US

2026 is an election year, with all House seats and 35 Senate seats up for grabs in the November midterms. Democrats are confident of strong gains amid voter frustration over living costs and the Epstein files. While retaking the Senate is unlikely, winning the House is realistic, giving them control of the legislative agenda and potentially even paving the way for impeachment proceedings against President Trump.

Not surprisingly, this is something he'll be keen to avoid, and he's likely to try to pull every lever to regain the initiative. A proposed $2,000 'tariff dividend' for millions of households runs the risk of being diluted by Congress, but the weaker the Republicans poll, the greater the chances it passes.

The President may also seek influence over monetary policy. Fed Chair Powell will be replaced in May, and the administration is pushing to remove Governor Lisa Cook. Kevin Hassett, Director of the National Economic Council, is the current frontrunner for Fed Chair. He is already pushing for further interest rate cuts and the President may look to install more dovish thinkers. This would make a sub-3% Fed funds rate in 2026 more likely.

Treasury Secretary Scott Bessent has repeatedly stated that the 10Y Treasury yield is the most important borrowing rate given its implications for government fiscal projections, mortgage rates and corporate borrowing costs. The US government is forecast to continue running a deficit of 6% of GDP over the next few years. Those deficit projections are vulnerable to any slowdown in growth, and if a tariff dividend payment is made to the same people who received the Covid stimulus cheques, it would cost $300bn, equivalent to half of the expected tariff revenues for 2026. There is clearly a risk that a glut of debt issuance starts to put upward pressure on yields.

If Treasury yields do climb, the next step for a Federal Reserve more attuned to President Trump’s way of thinking could be renewed asset purchases to lower the cost of borrowing across the economy, so-called yield curve control. Such a situation could prompt significant dollar weakness and potentially more inflation while pumping up the equity market even more.