By Howard Schneider
WASHINGTON, Nov 4 (Reuters) - From tariffs to oil prices, deregulation to health policy and the freight-train expansion of artificial intelligence, Democratic control of Congress will open a new phase in the battle over economic policies that drove Tuesday's broad voter rebuke of President Donald Trump and the Republican party.
Congress may not have direct control over things like tariffs, immigration enforcement or the agencies that have rolled back environmental and health rules,
and even de-escalation with Iran doesn't necessarily translate into a full reopening of the Strait of Hormuz and a drop in global oil prices.
But Congress does control the country's fiscal purse and ability to borrow, powerful levers it can use to bring Trump to the bargaining table.
How effective the new congressional leadership will be in striking deals — and where they focus attention — are open questions. But it was, after all, a campaign waged over affordability, so policies related to tariffs, energy costs and other bread-and-butter issues may be the centerpiece of Democratic efforts to rein Trump in, showdowns that raise the risks of a clash over spending and a government shutdown.
It could also shift the dynamics for the US Federal Reserve, with the new Democrat majority likely pushing in its oversight role for more aggressive steps to control inflation, and more skepticism that AI's spread will prove disinflationary. AI's trajectory itself may be shifting, particularly given the outcome in key states like Texas where booming data center construction may be slowed after voters elected Democratic governors who promised stricter oversight of AI's rapid buildout.
"The consequential policies that can be implemented quickly, namely trade policy and foreign policy, still are concentrated in the executive branch and in those areas, President Trump’s powers are still largely unfettered," Christopher Hodge, chief US economist for Natixis, wrote in an analysis as the Tuesday results pointed to a Democratic sweep. "But with solid margins in the House and Senate, Democrats can credibly threaten a government shutdown and to not raise the debt ceiling unless they receive concessions," on issues like restoring tax subsidies for health insurance axed under Trump-backed legislation.
In a statement on Wednesday, incoming Senate Finance Committee Chair Ron Wyden of Oregon gave a taste of the discussion to come, saying his committee would pursue a tax agenda that "requires the ultra-rich and corporations to pay their fair share," look at healthcare reforms, and "reassert congressional authority over our country's trade policy."
DEBT CEILING A 'NATURAL POINT OF PRESSURE'
The national power shift comes as the US economy appears in solid shape, with a 4.2% unemployment rate and growth accelerating in the third quarter at a strong 3.4% annualized rate.
Inflation, meanwhile, is stuck well above the Fed's 2% target and has been rising, fueled by shocks like Trump's tariffs and the war with Iran, and more recently the AI buildout, encouraged by Trump, that is funneling trillions of dollars to a sector that is bidding up prices for industrial materials, skilled labor and resources like electricity.
Controlling inflation may require reining in that growth a bit, which could also temper borrowing costs for businesses being outbid for credit by the top AI firms. Trump has trumpeted deregulation as a way to sustain higher growth without higher prices. But some of those steps, like relaxing car emissions standards, may be challenged by Democrats.
Trump's overall policy mix, meanwhile, has an uncertain net effect: Deregulation may lower business costs, but tariffs, the war in Iran, and an immigration crackdown limiting workforce growth have, most economists agree, raised them.
Democrats now have the public megaphone of hearings and investigations to probe those issues.
They also have power over tax and spending that goes directly to Trump's ability to govern. Budget legislation for agencies could now be crafted to reshape or limit what they are allowed to do. For hot-button issues like immigration, the operations of the Centers for Disease Control, the rollback of environmental rules or Defense Secretary Pete Hegseth's dismissal of top military officers, the bills could be backdoor ways to try to change policy.
Trump does have veto power, and Democratic majorities will not be large enough to override his decisions.
But without agreement on budget bills, spending and government operations have to stop, and those interludes can be when deals are struck.
"Historically, midterms have been sneaky turning points in fiscal policy," Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investments, wrote, noting the budget deal struck when Republicans took control of Congress during President Bill Clinton's first term, or budget cuts under President Barack Obama after Republicans won the House in 2010's midterms.
"The natural point of pressure for this to happen is around the debt ceiling negotiations" beginning late next year, he said.
Increases in the statutory debt ceiling are needed for the US to continue borrowing, a separate point of leverage for Congress.
"The view that divided government leads to policy paralysis in the US doesn't stand up to any serious scrutiny," Al-Hussainy said, with possible compromise points around things like cuts to Medicaid and various subsidies and tax policies fueling data center investment that became a key issue in several states now under Democratic control.
(Reporting by Howard Schneider; Additional reporting by Andrea Shalal; Editing by Dan Burns and Andrea Ricci )
