Midterm Elections, Affordability and the Fed

Summary

Ariana Salvatore and Seth Carpenter discuss the macro and policy implications of the midterm elections, focusing on constraints on fiscal stimulus, the impact of high energy prices on consumer spending and growth, and the limited scope for executive action. They conclude that energy prices, monetary policy, and growth dynamics—not new fiscal measures—will be the key drivers for markets.

• Higher energy prices are expected to drag on US consumer spending and growth, offsetting any benefit from higher tax refunds.
• Congress faces significant constraints on passing new stimulus due to deficits, procedural hurdles, and the limited legislative window before elections.
• Tariff policy is presented as the most feasible unilateral action the president could take, while direct fiscal transfers would require new legislation.
• The pass-through from energy prices to core inflation is historically limited, so the main macro impact is on spending rather than inflation persistence.
• If targeted stimulus were enacted, it could risk boosting inflation and altering the Fed's rate path, potentially leading to rate hikes instead of cuts.
• Markets should focus on existing fundamentals (energy prices, monetary policy, growth) rather than expecting new fiscal stimulus before the elections.