Democratic midterm win expected to shape AI rules, interest rates and Iran policy
The Democratic Party's victory in the 2026 US midterm elections is expected to influence AI regulation, interest rates and the conflict with Iran, according to Lombard Odier analysts. While Democrats may tighten AI rules, President Donald Trump retains veto power, limiting major policy shifts in the
The Democratic Party's takeover of the US Congress in the midterm elections is set to send ripples through key economic and global-market themes, including the artificial intelligence (AI) sector, US interest rates and the war with Iran, according to analysts at Lombard Odier. The result is in line with previous market predictions that put Democrats' odds above 90 per cent for the House and around 60 per cent for the Senate.
A Democratic sweep of both chambers would likely bring more AI regulation and security on data centre buildout. However, global demand for AI infrastructure, which has been a core engine for the US economy, persists regardless of who controls Congress, said Michael Strobaek, global chief investment officer at Lombard Odier. “A bit of regulation may not be too bad,” he added. But except for a minor compromise over the next two years, Democrats will not be able to impose a suspension on tech because Trump will veto any restrictions on data centres, Strobaek said. Trump retains veto power and broad authority over tariffs, immigration and foreign policy, limiting Democrats' ability to change his agenda, unless he needs money and budget to fulfil those policies, according to Samy Chaar, chief economist at Lombard Odier.
Democratic control of Congress is expected to bring a net positive outcome for markets, as it could likely curb the scope for further fiscal expansion and ease upward pressure on US interest rates. Fiscal policy would shift from tailwind to small headwind with an increase of the debt ceiling on sectors like healthcare, Chaar said. When Democrats take over the Senate, Trump can no longer nominate key members in key institutions like the Federal Reserve. With Fed independence, interest rates could be raised again possibly in December this year. Yields tend to trend downward after midterm elections, but this is probable for long-term yields, not short yields, and markets tend to drift upward in general, Strobaek said.
“I think probably the most important thing that at least the two years showed was they [Trump] failed pretty spectacularly on the promise of bringing the cost of living and affordability down in the US,” Strobaek said. “I am a strong believer that ultimately inflation and or prices is what breaks democracies and or swing governments.” The company has added duration exposure in US government bonds, finding yield levels attractive, though it retains a preference for five-to-seven-year maturities, as yield curves across most countries remain extremely flat, according to Strobaek. The US dollar will stay strong in the near-term future, and it is too early to begin hedging it, he added. Meanwhile, Chaar predicted that Democrats may start raising taxes, which should come from corporate taxes, but not from wealth taxes on individuals or from labour income.
Democrats will likely enhance constraints on Trump and help prevent the escalation of the conflict with Iran. Even as Trump frequently flip-flops on his decisions and the situation of the war is full of uncertainty, Trump cannot get the budget for a longer-term war, Chaar said. The energy sector will probably be most affected as Trump is a deep believer in energy and fossils, while the Democratic party is supportive of renewable energy, Strobaek said. The new Congress's inauguration is on 3 January 2027. Republicans retain control for roughly two months, giving Trump a theoretical opening for additional moves. Geopolitical disputes are unlikely to settle quickly, but near-term market volatility and a fresh spike in oil prices remain risks.