Midterm result seen as limited drag on US growth, with wider deficit ahead

what happened

Reuters notes that the Democrats' strong win in the US midterm elections triggered market swings, as investors feared it would slow AI development and stall policymaking in Washington. Sonal Desai of Franklin Templeton Fixed Income disagrees. In her view, slower spending on AI infrastructure would only moderately hit economic activity and would not push the Federal Reserve toward a softer stance.

Desai points out that AI capital spending added 1.4 percentage points to GDP against annual growth of 2.1% in the third quarter. Stripping out imported hardware could cut that contribution by at least half, leaving it below a quarter of US growth. She calls the idea that a divided government would shrink the budget gap "wishful thinking," since both parties favor higher spending and their dealmaking would widen the deficit.

In her base case, the growth outlook stays healthy, as looser fiscal policy and possibly lower energy prices, if the Iran crisis is resolved, outweigh the softer AI investment pace. A resilient economy, a firm labor market and entrenched inflation pressures could keep the Fed on track for two to three more rate hikes, most likely beginning in December.

why it matters

For investors, the key takeaway is that the midterm vote is being framed as a fiscal and inflation story rather than a growth shock. Treasury yields and US stocks would likely react to how the Fed weighs bigger spending against energy price moves. This is one strategist's view, not a forecast.

market impact

US Treasuries: expectations of a bigger deficit and possible Fed hikes weigh on bond prices

• ▼US Treasuries pressure down — wider deficit expectations and possible Fed hikes push yields higher

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