Republican control of Congress likely to lead to gridlock

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Roger Bridges, Global Rates & Currencies Strategist & John F. Vail, Chief Global Strategist, Nikko Asset Management comments on the result of the US mid-term elections.

Following the mid-term elections in the US, the Republicans have taken control of the Senate with 52 seats and have increased their majority in the House of Representatives so that they now control both chambers of Congress for the first time since 2006.

The unpopularity of President Obama was a major factor in the result, but the fact that only 36.6% of the electorate actually voted works against the incumbent party and the Democrats in general.

Turnout usually drops for mid-term elections compared with Presidential elections, which may dampen some of the enthusiasm on the Republican side regarding the 2016 Presidential election.  For example, in the 1998 Presidential election Bill Clinton was elected for a second term even though the Republicans had taken control of Congress in the mid-term election.

The result means we will likely see continued gridlock in Washington, but with it now being Congress vs. the President, rather than the House of Representatives vs. the Senate.  Major disagreement is likely over Obamacare, the environment and immigration, areas where the President and Republicans are diametrically opposed.

The environment cuts across many policy areas such as energy, foreign and industry policy.  The Democrats lost major energy states due to Obama’s environmental policies, such as the coal-producing Western Virginia and gas states like South Dakota. Generally, environmentalists don’t like fracking and exporting of oil but the Republicans are supportive and it appeals to many voters since it makes the US self-sufficient and less reliant on energy from the Middle East.

Another area where gridlock has been noticeable between the House and Senate is the House Bill passed in September which directs the Government Accountability Office to conduct a full audit of the Federal Reserve (Fed), including its deliberations on monetary policy. This was kept off the Senate floor, after passing the House, by the Democratic-led Senate.

However, this could change under the new Senate.  Some Republicans feel the Fed is overstepping its mandate by engaging in quantitative easing and giving dollar swap lines to other central banks.

The idea of auditing the Fed was first raised by Paul Ryan, but the idea was eventually defeated since the Fed was able to gain assistance from the White House.  With a Republican-held Congress, there may be renewed pressure to conduct the Fed audit and try to reduce its level of independence.

One reason for the US debt ceiling crisis of 2011 and fiscal cliff debacle of 2013 was the fact the White House was less engaged with Congress than it had been under Obama’s predecessors.  If Obama wants to build on his legacy over the next two years, this will need to change.

Although there are potential flashpoints, there are some areas where the President may actually be more united and willing to cooperate with the new Congress, such as being awarded the authority to fast track trade agreements, particularly the Trans Pacific Partnership (TPP), about which the Republicans are much more positive than the Democrats.

However, there is doubt whether under his presidency it would proceed since he is likely to try and drive hard bargains with other countries so that US labour and environmental standards are protected, along with US agriculture.

Thus, there is a significant chance that TPP will not go forward under his leadership and countries may decide to wait for the possibility of a Republican President rather than make large concessions (if they feel they can wait two years).   The central part of his foreign policy agenda has been the ‘Asian pivot’, for which the TPP was a central platform. So passing the TPP under his leadership would reinforce his legacy that he pivoted US policy towards Asia.


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