Trump’s Power Looks to Be Slipping. What Could Come Next.

Tuesdays election results prompted a rare admission from President Donald Trump: Something had gone poorly for him.

The shutdown was a big factor, negative for the Republicans, he told his partys senators in a dissection of Tuesdays Democratic sweep of votes in New York City, New Jersey, Virginia, and California.

The Supreme Court appeared to pile on. Conservative justices probed the governments justification for tariffs at a closely watched hearing on Tuesday.

It is notoriously difficult to forecast Supreme Court rulings, but the politically challenging events of the past several days suggest that the Trump administration is going through a moment of transition. A president who has reveled in his ability to single-handedly direct policyoften prompting stocks, bonds, and the dollar to swing rapidlynow suddenly finds himself more constrained.

Investors may take immediate comfort from that, since the status quo has allowed stocks to hit records while producing relatively low and falling bond yields. But the shift in U.S. politics poses some long-term worries, too. Trump personally may find his power weakening as the midterms approach; meanwhile, the other side is learning from his strategy.

A new breed of Democrats is willing to seek and wield power in unprecedented ways, too. That could upend the environment that has allowed investors to keep focused on the promise of artificial intelligence and interest-rate cuts from the Federal Reserve to the exclusion of the political chaos.

That policy environment is relatively stable for the moment, although the Supreme Courts skepticism of tariffs poses a wild card. At the hearing, Trump-appointed justices asked whether tariffs werent really the sort of tax-and-spending policies that the Constitution leaves to Congress, not the president.

The tens of billions of dollars in revenue raised by tariffs so far have been essential to the fiscal story the government is telling. The deficit is set to drop to 5.9% of gross domestic product from 6.4% last year, Treasury Secretary Scott Bessent said recently. If we are contracting spending, then I would think inflation would be dropping. If inflation is dropping, then the Fed should be cutting rates, Bessent told CNN on Nov. 2.

Some in the markets have worried that a Supreme Court ruling that invalidated the tariffs would threaten that trend, by eliminating a source of revenue and putting the deficit on a worse trajectory.

But the case may be overstated. As important as this Supreme Court case is, it is unlikely to change the tariff strategy and the desire to use that revenue going forward, says Greg Peters, co-chief investment officer of PGIM Fixed Income. The Trump administration is likely to move swiftly to impose alternative tariffs based on different legal authorities that would keep the money flowing into the Treasury.

Nonetheless, the administration would find itself on the back foot on its signature policy. It may find enough revenue to satisfy the bond market, but countries that have been forced to the negotiating table may be reluctant to make or uphold concessions knowing that the presidents power is in question. That could slow the flow of trillions of promised investment dollars in the U.S. economy.

Trump also finds himself constrained in Congress. The Senate recently passed a resolution that would end the emergency used to justify many of his tariffs. The measure wont ever reach Trumps desk because the House is opposed, but it is a potent political symbol.

Republican Senators have also resisted Trumps demand to end the filibuster, which requires 60 votes to pass most legislation. After Tuesdays elections, the strong Democratic performance could end up making some Republicans less willing to go along with Trump out of self-preservation ahead of the midterms, write Lew Lukens and George Pollack of research firm Signum Global Advisors in a note to clients.

Trump has a knack for finding surprising new ways to get his wishes, and it would be unwise to count him out based on a good night for a few of his opponents. But in the bigger picture, the elections signal that Trump may not always be the loudest politician in the room.

Trump is no longer the only Trump, says Ed Price, nonresident senior fellow at New York Universitys Center for Global Affairs.

Among the new ones is Zohran Mamdani, the charismatic young democratic socialist elected as New York Citys next mayor. He won on expensive policy promises that will be difficult to keep. He wants, for instance, the city to issue $70 billion in debt to build new affordable housing, a plan that would exceed the debt cap in the states constitutiona problem he plans to fix byremoving the cap.

Likewise, Californias Gov. Gavin Newsom won a measure to redistrict the state in favor of congressional Democrats. He pitched that plan as fighting fire with firebeating Trump at his own game. The president is pushing Texas and other states to hand seats to Republicans to give the party an edge in the midterms, which tend to go against the party in the White House.

Former Vice President Kamala Harriss failed presidential campaign promised small change while pledging at least lip service to cutting the deficit. (In truth, her spending plans would haveexacerbated it.) The next Democratic standard-bearer is unlikely to constrain him- or herself that way. Harris pledged a convoluted tax break to help first-time home buyers, for instance. That kind of modest ambition wont fly again in the wake of Mamdanis unapologetic demand to freeze the rent.

The lesson that Democrats win against Trump by becoming Trump has some uncomfortable implications while inflation remains stubbornly stuck at 3%.

The Fed under Chair Jerome Powell is already rethinking its plans for rate cuts in December and beyond, in light of the risk of a resurgence in inflation. But Powell wont be in control for much longer. His term as chair will end, and Trump has pledged to replace him with a candidate who has committed to further rate cuts.

The trouble with that policy isnt that it would hurt the market, at least not at first. Easier money will probably boost the price of stocks and crypto. The problem is that once the norm of an independent Fed is broken, no politicians will find it in their interest to take the punch bowl away. That will be true of a Trump-ier Democratic Party just as it will be true of Trump himself.

Trumps winner-takes-all attitude to governing has raised the stakes of U.S. politics. He has used his authority in many ways to help the market, by slashing regulation and lowering taxes. But the trouble with changing the rules of the game is that the other side wont play by them anymore, either. Trump has set off a competition for power that rewards simply winning far more than sound policymaking. How long that continues to support a strong economy and healthy markets is anyones guess.