American voters have delivered an unmistakable election-year message to President Donald Trump and the incoming Democratic congressional majority: repair the damage inflation has done to the U.S. economy. The results of Tuesday's midterm voting set up a period of divided government in Washington, with both parties under pressure to make middle-class life more affordable before the next election cycle.
Trump had warned on the campaign trail that a Democratic takeover of Congress would trigger a 1929-style economic depression, and he continues to insist the economy is booming. Since his party's losses, he has signaled a willingness to work with Democrats in the House and Senate, something he has rarely done in the past. "I'll get along, probably, with the Democrats, unless they want to be destructive," he told reporters last week.
After a strong jobs report on Friday showed employers adding 165,000 positions and the unemployment rate dipping to 4.1%, Trump struck a defiant tone. "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 supporters.
Democrats, seeking to check Trump's power, are preparing for early battles over government spending, along with chronic budget deficits, tariffs, artificial intelligence and a Social Security system that could run short of money in as little as six years. As long as rising prices squeeze household budgets, both parties risk alienating voters. "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 helped push the consumer price index up 3.7% annually, and he has tried to pressure the Federal Reserve, the independent body tasked with keeping inflation low, into slashing its benchmark interest rate. Analysts say the new gridlock could give the central bank more room to guide inflation back to its 2% target, which it has missed for nearly six years. "I think that one of the surprise winners Tuesday was the Fed," said Douglas Holtz-Eakin, president of the center-right American Action Forum, noting that a Democratic Senate could block Trump's nominees to open Fed board seats and clear a path for Chair Kevin Warsh "to follow his instincts and aggressively reduce inflation."
The federal debt adds further strain. Interest payments now top $1 trillion a year, exceeding military spending, and investors have pushed up the rates charged on government borrowing. Neither party ran on spending cuts: Trump wants an additional $500 billion annually for the military, while some Democrats want to restore Affordable Care Act subsidies that lapsed under him. Treasury Secretary Scott Bessent and White House budget director Russell Vought are preparing a "fiscal consolidation plan," promised since August, to trim the roughly $2 trillion annual deficit. Goldwein said real deficit reduction would likely require both tax increases and spending cuts, with lower Medicare costs the lowest hanging fruit. "It's not rocket science," he said.
Harvard economist Jason Furman ranks artificial intelligence as the nation's most pressing economic issue, calling it "the most screamingly obvious investment boom this country has ever had, or, possibly, second to railroads." Econvitals, an analysis tool he built using AI, found an 80.6% jump in data center construction over the past year while spending on homes, schools, factories and offices fell. Stocks sold off last week on concerns Democrats might restrict data centers and impose AI guardrails, even as a majority in The AP Voter Poll said AI does more harm than good for the economy. Trump has championed the sector and resisted new regulation, brushing aside worries about job losses and cyberattacks. "Every time you have a single strength in an economy you are also having a big vulnerability," Furman said.
Senators who won six-year terms last week will also face the fraught task of rescuing Social Security, which is projected to be unable to pay full benefits after 2032. Options such as lifting the cap on payroll taxes or raising the retirement age would need bipartisan support, since the program cannot be overhauled through party-line reconciliation votes. Sen. Elizabeth Warren, D-Mass., said she reached out to Sen. Bernie Moreno, an Ohio Republican, within days of hearing him discuss lifting the payroll tax cap, and the two are developing legislation. Experts say "the checks that go out to seniors will drop by nearly a quarter" after 2032, Warren noted, adding of the millions who depend on those benefits: "And Congress is doing nothing."
