Episode summary
Midterm Elections, Affordability and the Fed
Thoughts on the Market (Morgan Stanley)
· · Hosts: Ariana Salvatore, Seth Carpenter
Summary
Higher gasoline prices are doing more than weighing on sentiment: the guest argues they are already a drag on U.S. growth and are likely to offset any lift from higher tax refunds this year. Morgan Stanley has cut its U.S. growth forecast by about 3 or 410 a percentage point for 2026 because of energy costs, while expecting the inflation impulse to be mostly confined to headline CPI rather than core inflation.
The discussion centers on what, if anything, Washington can do before the midterm elections. The guest says Congress faces four major constraints: already-large deficits, difficult legislative procedure, a narrowing pre-election calendar, and the lag between passing policy and getting money into the economy. Even if lawmakers approved targeted relief, the size, speed, and recipient mix would matter, but households may use extra cash to pay down debt, muting the spending impact.
On unilateral action, the guest says broad cash payments or rebates would be legally and operationally much harder than tariffs, because fiscal spending rests with Congress and there is no standing mechanism for the administration to send out large checks quickly. If targeted support does emerge, it would likely focus on lower-income households, energy relief, or nutrition support. But the guest warns that if such measures sustain spending while prices are still elevated, the Fed could end up hiking instead of cutting.
Key takeaways
- The guest says higher energy prices are already enough to outweigh any boost from higher tax refunds and reduce U.S. growth this year.
- Morgan Stanley has lowered its U.S. growth forecast by about 3 or 410 a percentage point because of the oil shock.
- The guest expects the energy shock to lift headline inflation but have only a limited pass-through to core inflation.
- Congress faces deficits, procedure, timing, and implementation constraints that make a pre-midterm stimulus package unlikely.
- Targeted relief aimed at lower-income households could support spending, but it could also intensify inflation pressure and alter the Fed’s rate path.
- The guest says broad direct payments from the administration would be legally difficult because fiscal spending power rests with Congress.
Notable quotes
“higher gas prices that we have now and likely to have for the rest of the year are going to be more than enough to offset any boost to consumer spending”
“We've also got at least somewhat restrictive monetary policy layered on top”
“We tend to frame affordability policies across five vectors: energy, healthcare, housing, consumer credit, and trade policy”
“there isn't really a comparable mechanism the administration could use to send out broad-based checks, for example, without new legislation”
“good news could be good news, but there are going to be lots of details”
How the episode opens
Welcome to Thoughts on the Market. I'm Ariana Salvatore, head of public policy research for Morgan Stanley.
And I'm Seth Carpenter, the firm's global chief economist and head of macro research. Today, we're discussing the run-up to the midterm elections and what it could mean for the macro outlook and policy response. It's Wednesday, April 29th at 10:00 a.m.
in New York. Last week, Mike Jesus and I talked through the midterm elections and their potential consequences for the economy and markets. This week, we figured it might be helpful to talk about the setup into November, especially as we're both increasingly being asked about the macro outlook and potential for targeted stimulus to offset the oil shock.
So, Seth, let's start there. We know cost of living is a key issue in elections, and we've seen a pretty meaningful oil shock feed through markets. How are you thinking about that in the context of the broader economy?
Our US economics team has estimated that the higher gas prices that we have now and likely to have for the rest of the year are going to be more than enough to offset any boost to consumer spending from the higher tax refunds this year. So I think that's the first point. If you're expecting a boost to come through that channel, you probably want to unwind that.
And in fact, overall what we've done is lowered our forecast for US growth by about 3 or 410 a percentage point worth of growth for this year because of the higher energy prices. So, it's a drag on spending, I think, no matter how you cut it.
And that's not happening in isolation, right? — No, that's exactly right. That's exactly right. We've also got at least somewhat restrictive monetary policy layered on top.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- midterm elections
- affordability
- energy costs
- fed policy
- government initiatives
Watch the episode
Watch “Midterm Elections, Affordability and the Fed” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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