Historic Blue Tsunami delivers major blow to Trump’s Fed ambitions

The Blue Tsunami has redrawn Washington’s political map, and the Federal Reserve could be one of its biggest institutional beneficiaries.

Households, businesses, and investors will be carefully watching to see if the affordability concerns from rising inflation, sticky tariffs, and the energy crisis of the Iran War that fueled millions of American voters to vote Democratic will be addressed in a timely manner over the next two years.

Based on the historic — and still counting — results of the U.S. midterm elections and the dramatic shift in power in the next Congress, here are my five top takeaways regarding how the Blue Tsunami may impact the Fed’s monetary policy, Board of Governors, and overall operations over the next two years.

Monetary policy won’t end the endless Iran war or erase high tariffs or lower mortgage rates, but it does play a role in shifting the burdens on wallets and retirement portfolios.

The Democratic victory does not give Democrats control over monetary policy. Nor does it mean it can stop raising interest rates.

Gives greater independence and operational flexibility

The overwhelming Democratic victory in Congress gives the U.S. central bank a freer hand to conduct monetary policy. The Trump administration will have a harder time stacking the central bank’s board and the rate-setting Federal Open Market Committee with allies committed to slashing short-term borrowing costs, as the president has been demanding for the entirety of his second term.

According to Fed watchers like Moody’s Analytics Chief Economist Mark Zandi, this provides the Fed with operational flexibility consistent with its independent dual mandate from Congress: maximum employment and price stability.

“It allows the Fed to conduct itself in a different way. Does it change what happens with rates? Probably not, but it gives the Fed the operational flexibility to conduct policy in a way that is consistent with its mandate,” Zandi told American Banker.

Stalls White House push to remake the Board of Governors

Copious efforts by the Trump administration to replace or remove Biden-era holdovers on the seven-member Board of Governors — such as the court case surrounding Fed Governor Lisa Cook — face a significantly fortified roadblock with the Democratic-controlled Senate holding confirmation and oversight power.

Preserves Supreme Court protections

The high legal bar set by the Supreme Court earlier this year preventing the abrupt removal of Fed governors, not only Cook but former Chair Jerome Powell, remains intact. This means independent monetary policymaking is largely insulated from executive overreach and partisan politics.

Creates a steady data-dependent path for interest rates

With the political pressure to force lower rates effectively muzzled, the Fed can maintain a deliberate, gradual approach to interest rates.

Cleveland Fed President Beth Hammack and Richmond President Thomas Barkin both emphasized Nov. 5 that this gradual approach to interest-rate hikes or cuts will remain the preferred tool to reliably bring inflation back down to the Fed’s own 2% — a goal nearly six years in the making.

Hammack and Barkin spoke on the same day markets suffered notable losses from investors worried about the outlook for the tech sector in the wake of the midterms which could lead to less growth and investment for artificial intelligence, a major source of voter ire and concern across the country.

Builds fiscal gridlock and legislative constraints

The shift in Congress eases a gridlocked political environment that will come to fruition in high-stakes fiscal policy tests such as the approaching December government shutdown.

This legislative gridlock limits the Trump administration’s capacity to pass aggressive, last-minute fiscal policies in high-stakes measures with the lame-duck GOP-led Congress.

It will help to keep overall economic demand and supply more balanced without forcing the Fed into an even-more tightening stance.

“The Fed can only manage to the aggregate data, which mask the burn of inflation and pain too many are feeling. Markets are pricing in two hikes in 2027, while many Fed hawks say “at least” two more, KPMG Chief Economist Diane Swonk said in a LinkedIn post after the unexpected strong job numbers for October came out Nov. 6.

Latest December FOMC rate-hike bets

The FOMC voted 10-2 on Oct. 28 to hold interest rates steady in the range of 3.75% to 4% after a 25 basis-point hike in September. During the October post-meeting press conference, Fed Chairman Kevin Warsh said the majority of the policymakers felt it would be prudent to await additional accumulation of data before considering another rate hike.

San Francisco Fed President Mary Daly said Nov. 6 that more interest rate increases are likely to be needed to tame inflation, but added it was still too soon to know how much higher.

More Fed:

Markets broadly expect another 25 basis-point increase in December but what happens in 2027 and beyond is unclear.

TD Securities said “we remain confident” that the Fed will hike rates a total of half a percentage point by the start of next year.

“If the midterm elections ⁠result in finding closure on the Iran war and/or the paring back of AI investment, the Fed might not need to tighten policy any further after March,” its analysts said in a note.

The CME Group FedWatch tool barely moved after the election outcome and is currently pricing a probability of a 25 basis-point hike in December at roughly 74.8%.