Podcast Source: JPMorgan Chase

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JPMorgan Chase Chief Global Economist Bruce Kasman and Geopolitical Center Director Derek Chalett analyzed that the Democratic Party regaining control of Congress will lead to more accommodative fiscal policy, worsening the deficit and creating upward pressure on interest rates in 2027; the Federal Reserve faces personnel turnover risks, and the ongoing Middle East conflict and political dynamics in Latin America continue to disrupt the global foreign exchange and trade environment.

Participants: Host Kathleen Melody; Guests Bruce Kasman, Derek Chalett. The main text refers to “host, Kasman, Chalett” as labels.

Host: Welcome to JPMorgan Chase's "Making Sense" program. I am Kathleen Melody, serving as the head of federal government relations at JPMorgan Chase. Today, first, JPMorgan Chase's Chief Global Economist Bruce Kasman will join us to discuss how the outcome of the U.S. elections will shape U.S. fiscal policy and federal borrowing, as well as which transmission channels to focus on globally, especially interest rates and foreign exchange markets. So, let's get started. Bruce, thank you very much for joining our program.

Kasman: Thank you, Kathleen. I am glad to be here.

Host: Let’s start with the U.S. midterm elections. Now that the Democratic Party controls Congress while the Republican Party still holds the White House, what are the main factors that will affect U.S. fiscal policy changes next year? How do you think this will impact the budget deficit? Will there be any changes regarding tariffs?

Kasman: With the Democratic Party controlling Congress and the Republican Party in charge of the White House, I think there are essentially two core variables. First, the budget for next year originally included significant cuts to social welfare spending, especially in healthcare. We believe that as the Democrats gain greater leverage in Congress, especially when they have to vote on the budget and extend the debt ceiling next year, it is highly likely that these welfare cuts will be rolled back. This is already factored into our forecasts, and even when the Democrats only held the House of Representatives, this was our expectation. Therefore, from a macroeconomic perspective, that is already a given. I think the most notable point is that all cuts may not be realized, which will undoubtedly affect the budget deficit. Another question is whether tariff policies will change against the backdrop of ongoing related investigations. I believe there is indeed a desire within Congress to push for the removal of tariffs. How this game of negotiations will ultimately evolve, we do not currently have complete confidence. However, our baseline forecast remains that tariff rates will actually rise slightly next year.

Host: Thank you, Bruce. That is very informative. Did the midterm election results change your predictions for economic growth or GDP, or did it largely reinforce existing baseline forecasts? Did it change the risk distribution surrounding that outlook?

Kasman: Regarding changes in predictions, I want to emphasize that given the Democratic Party has at least won control of one chamber of Congress, we had already incorporated a shift in fiscal policy into our models. Additionally, we have accounted for the drop in oil prices in our expectations. In this context, the most important point is that these developments strengthen our existing baseline forecasts, reduce the risk of persistent high oil prices, and eliminate some of the risks of significantly tightening U.S. fiscal policy. I think the possible risk that may prompt further discussion in our forecasts is that fiscal policy could actually shift more aggressively towards easing. This could add some momentum to economic growth, but on the other hand, it could start to put pressure on the budget deficit, which I think could translate into a slight rise in interest rates by 2027. Therefore, these trends are more on the risk side without shaking our baseline forecasts. I repeat,

Host: Thank you for your insights, Bruce. What kind of ripple effects are the U.S. election results having on the global economy? Do you think the greater impacts will be felt through foreign policy and oil prices, or will there be potential implications for technology spending?

Kasman: I think the impacts are indeed transmitting, but this will depend more on its effects on foreign policy. In terms of foreign policy, the president certainly still has considerable autonomy. And whether these signals will lead to substantive changes. Currently, the biggest

Speaker C: Changes

Kasman: Factor is the trend in oil prices. If a drop in oil prices can be validated by some degree of easing in the Middle East situation, I think this will play an important role in the macroeconomic outlook. This is already factored into our forecasts. We have always assumed a significant staircase-like decline in oil prices in the first half of next year. I believe the election results have at least marginally reinforced this trend. On the other hand, tech stocks and overall technology spending may face discussions on implementing stricter limitations from state, local, or even federal levels. We tend to downplay the substantive impact of this and believe it will have a limited impact on the technology spending cycle. We think the more critical variables are the direction of Federal Reserve policy, the difficulty of obtaining credit, and whether the broader corporate community will maintain sufficient confidence and comfort in capital expenditures as shown in their 2027 plans.

Host: One narrative emerging after the Democratic wins involves concerns over growth prosperity. Does your team share similar concerns about economic growth?

Kasman: I think this election result will further intensify the existing pressure to restrict the construction of data centers. This, in turn, confirms the view that technology spending growth will slow down by 2027. Similarly, this is already included in our forecasts, and we do not believe that the occurrence of this election will change this trajectory. I think the core issue is whether this will have a significant negative impact on profit expectations, impose deeper constraints on the industry, and in turn apply greater downward pressure on asset prices and possibly affect credit availability. The biggest risk is whether the political shift will generate more pressure in financial markets. If this happens, it may backfire on the macro outlook. As we examine our 2027 outlook, this is definitely one of the key risk points we highlight.

Host: Bruce, how do you view the impact of the midterm election results on the Federal Reserve? Will it change the degree of governmental pressure on the Federal Reserve? What does the Democratic-controlled Senate mean for the federal appointments and confirmations to the Federal Reserve?

Speaker: I think

Kasman: When considering the impact of this election on the Federal Reserve, I want to first point out that in our past discussions, we have consistently emphasized that the Federal Reserve is not substantively influenced by governmental pressure. But I do believe this will have some impact on Fed personnel. It is now evident that any confirmation process for a Federal Reserve official must go through a Senate led by the Democrats. I think this has significant implications in two aspects: First, the government had previously exerted pressure on Lisa Cook and to some extent on Chair Powell to leave, in order to have the opportunity to install more aligned members on the board; this pressure may have eased somewhat. If it is fundamentally impossible to get the preferred nominee confirmed, the actual gains from pressure are very limited. On the other hand, for those who were originally inclined to leave but hesitated due to concerns over successor choices, the space for leaving has now increased. As the Democrats are responsible for confirming nominees, this concern has significantly diminished. Therefore, Chair Powell, whose term ends in early 2028, may leave earlier than expected. I think there might be one or two other members who will also leave early, and we may see changes in the Federal Reserve that exceed prior expectations next year.

Host: Alright, Bruce, let’s ask you the final question. As the largest economy in Latin America, how might the election results in Brazil reshape the trade and financial situation in the region?

Kasman: The election results in Brazil were clearly somewhat surprising, and Lula’s administration can be seen as a reflection of policy continuity in a certain sense. From our perspective, the core issue is that its budget is already extremely tight and urgently needs substantial fiscal consolidation. The new Lula government’s commitment to this direction is not entirely clear at this point. Amid market doubts creating downward pressure on the country's currency, we have been revising our forecasts and have canceled some of our previous expectations for central bank loosening in the next year. From a broader perspective, inter-regional relations are crucial. In particular, it was previously thought that if Bolsonaro won, Brazil's relationship with Argentina would be reshaped, and the Mercosur agreement would face adjustment pressure, potentially impacting trade with the U.S. and the region. These variables that were being considered have now been somewhat overturned. At the regional level, the real focus is on the extent to which this result will spill over and be reflected in the Argentine elections in 2027.

Host: Bruce, thank you very much for systematically outlining the immediate market and macro impacts, especially surrounding fiscal pressures, borrowing needs, and how these results transmit to interest rates, forex, and the regional financial environment. Thank you very much for taking the time to share your insights. Next, I’d like to broaden the perspective and invite Derek Chalett to join us. Derek, welcome to the program.

Chalett: It's great to converse with you. Thank you for your invitation.

Host: Derek, you have referred to the U.S. midterm elections as a decisive domestic pivot point for 2026. Listening to the content just now, now that the U.S. midterm elections are settled, what policy areas are you currently paying closest attention to?

Chalett: Certainly. The scale and impact of the midterm elections cannot be overstated. What was once referred to as the “blue wave” is now being called a “blue tsunami.” I think there was already general agreement on the broader direction beforehand, that is, people anticipated that the Democrats would win the House and even likely the Senate. However, I think the dramatic nature of this shift—not just in obtaining a majority, but in achieving a decisive supermajority in both chambers of Congress—is something that very few could have truly predicted. Therefore, we are still clarifying the complete implications behind all this. On one hand, it will have a significant impact; but on the other hand, its substantive changes may be limited because U.S. Presidents traditionally have significant discretion in foreign policy. As we have seen from history, every president tends to shift focus to foreign policy during the last two years of their second term. We have seen this with Ronald Reagan, Bill Clinton, George W. Bush, and Barack Obama. I expect we will see a similar shift under the Trump administration, as the president usually faces a divided Congress in the final two years of re-election, making it difficult to achieve much in the domestic agenda,

Speaker: whereas on

Chalett: foreign policy they have more leeway. Thus, I expect the president to remain quite active in foreign policy. Of course, Congress can also interfere by introducing bills and holding hearings to set or guide policy agendas. I anticipate that when the new Democratic Congress takes office in January next year, we will see some early initiatives, and I think Congress will propose and likely pass legislation that not only receives support from the Democrats but also potentially gains backing from some Republicans to limit or even eliminate certain tariffs imposed on countries like Canada. Additionally, depending on how the situation evolves in the coming months, one of the clear signals from the midterm elections is that this area will also see some responsive measures. Overall, we still need to digest the full implications of these changes and their impact on 2028. But what is certain is that the policy environment in a few months will be vastly different from the past two years.

Host: That sounds great, thank you. Looking ahead,

Chalett: One of the most surprising aspects from Tuesday night, which is another area we are still sorting through, is that the Democrats successfully flipped many states that had not been won by Democrats for many years or even decades. For example, Kansas has not elected a Democratic senator since the 1930s; Texas has not elected a Democratic senator since 1988. These states not only flipped but did so decisively, not by narrow margins; in Texas, they even achieved a double-digit overwhelming victory. This has fundamentally reshaped the political landscape for 2028. In past presidential elections, Democrats did not spend much energy thinking about how to win in Texas; now they must invest time and effort to strategize about it. This opens up immense imaginative space and strategic choices for future presidential elections. This will also change the characteristics of the candidates considering running. Over the past few years, the Democrats have been discussing between moderates and the radical left. I think this discussion will undoubtedly continue, but now the core issue is finding new types of candidates who can be competitive in Texas, no longer confined to traditional deep blue states or familiar upper Midwest "blue wall" maps. The path to victory has become more diverse.

Speaker: The winning

Chalett: Paths are showing diversity. I believe this will fundamentally change the discussions about the future political direction. Since many newly elected Democrats are representatives who flipped traditional red districts, I actually expect to see more centrist discussions emerge within Washington on certain levels.

Speaker: Many

Chalett: Of the new members represent voter groups who previously voted for Republicans in the last election or even in past elections. Therefore, to establish themselves and be re-elected, in addition to addressing the demands of hardline Democratic voters, they must also consider and represent the interests of these moderate and somewhat conservative voters. In a time of extreme polarization, it has been rare for political figures to accommodate voters from both parties; now a large influx of new Democrats must consider both sides, which I believe is beneficial to the overall political system, as it will bring some change to the policy debate atmosphere within Washington.

Host: I completely agree, and I think this is true within both parties as well. Derek, how do you think the midterm election results will impact the subsequent trajectory of this conflict?

Kasman: It indeed has an impact.

Chalett: It mainly manifests in the strategies the U.S. adopts in response to this crisis. It is essential to emphasize that both parties remain highly skeptical of Russia's motives and credibility. Now within Congress, the Democrats combined with a majority of Republicans form a solid majority, and they will actively seek ways to provide support to Ukraine and further increase pressure and punitive costs on Russia. A few weeks before the midterm elections, but so far, this authorization has not been practically exercised. Therefore, I expect that if the situation remains stagnant when the new Congress is sworn in next January, Congress will take legislative action to force the president to utilize the powers already granted to increase sanctions on Russia. The same is true for aid to Ukraine, as Congress has relied on bipartisan support to provide significant aid to Ukraine over the past years. Two years ago, the U.S. somewhat withdrew from direct support, so I expect there will be legislative activity in Congress attempting to push the government to restore and increase support for Ukraine.

Speaker: The president

Chalett: The president has veto power. It is extremely difficult to overturn a presidential veto because a two-thirds majority is required in both chambers. However, on the issue of Ukraine, I believe it may be possible to gather enough votes to overturn the veto. Therefore, the situation remains to be seen. Meanwhile, this process will occur against the backdrop of the government striving to facilitate some resolution regarding the Ukraine issue. Recently, a meeting involving both Russian and Ukrainian parties is set to be held in Abu Dhabi. In recent weeks, we have witnessed a surge of intense diplomatic activity. Therefore, on one hand, we will see some attempt to restart or at least push for a restart of U.S. support for Ukraine; on the other hand, governmental-led diplomatic shuttle regarding Ukraine will only become increasingly intensive.

Host: Now turning to Israel. This election has been referred to as one of the most consequential elections in the country’s history. Were you surprised by the election results? How might this change Israel's position in the international landscape?

Chalett: Between Brazil, Israel, and the United States, this is clearly a densely packed election month. By the way, next year will also be a significant election year, especially in places like France, Poland, and Italy in Europe. I think the election results in Israel are both expected and somewhat surprising. The expected part derives from all the polls showing it would be a closely contested election. Although Prime Minister Netanyahu's ruling coalition lost several seats, its overall performance was still slightly better than expected. The surprising aspect was the strong performance of the Israeli Arab parties. Many may not realize or have overlooked that this is indeed unexpected. Israel implements a coalition government system that is profoundly different from that of the United States, with numerous parties involved. We are currently in a possible political game that may last for weeks or even months, with different parties needing to bridge their differences to form a governing coalition, and the final configuration may have various combinations. I expect the coming weeks will be filled with highly tense behind-the-scenes maneuvering and compromises of interests. Ultimately, is it possible to establish a coalition government with Netanyahu still involved? On a broader note, Israelis also understand that the new government will have profound effects on the broader U.S.-Israel relationship, after all, discussions about U.S.-Israel relations are shifting within both parties. As Republicans reflect on the lessons of Tuesday night and their future direction, some individuals, including the Vice President this week, have questioned the future prospects and implications of U.S.-Israel relations.

Host: You did mention this earlier, but I want to directly follow up: How will the election results in the U.S. and Israel affect the current Middle East conflict? Is the risk of escalation rising or falling?

Chalett: Frankly, we do not know yet. Before the elections, it is now more certain that the lessons of the midterm elections may likely be that one must seek to reach an agreement or find an exit strategy. The post-election situation has not gained more popularity. However, the U.S. finds itself in a kind of catch-22: the situation remains unresolved, Iran continues to pose a threat to the Strait, and energy prices remain high. Therefore, I believe the government will desperately seek some form of resolution. Unfortunately, I think Iran currently does not have particular motivation to cooperate with the U.S. to reach a compromise, to deliver a so-called victory to the U.S. Therefore, I think we will still have to reckon with intermittent military skirmishes and repeated friction for much of the next two years.

Host: Thank you, Derek. I will leave the last question to you. Looking at Latin America, to what extent do the election results in Brazil reverse the overall rightward trend in the region? What implications does this have for other parts of the world?

Chalett: For many people, the election results in Brazil were somewhat unexpected. In the first round of voting in early October, opposition candidate Flavio Bolsonaro led steadily by two to three percentage points, and it was widely anticipated that incumbent President Lula would lose; however, Lula eventually overturned the odds with a narrow advantage, which indeed was surprising. As you mentioned in your question, the region has shown a shift to the right in recent years. I cannot say for certain whether Brazil represents a complete reversal of this trend; Brazil is the largest economy in South America and an important trading partner for the U.S. It is well known that the newly re-elected Brazilian President Lula does not have a very amicable relationship with President Trump, and they have had very heated exchanges on trade issues. Therefore, it is reasonable to expect that these tensions are likely to persist in the future. Now that President Lula has successfully been re-elected, he is more confident, while the U.S. president is entering the end of their term and seeks to achieve accomplishments on the international stage to solidify their historical status. I think this will not only have significant impacts on the region but will also resonate globally.

Host: These interpretations are incredibly valuable, Derek. I am very glad you could join our discussion today; your insights are extremely profound. Thank you very much!

Chalett: Thank you for your invitation.

Speaker C: Thank you for listening to JPMorgan Chase's "Making Sense" program. This communication is for informational purposes only. Please visit the relevant disclosure pages for important disclosure information. © 2026 JPMorgan Chase & Co. All rights reserved.

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