Is Gridlock Good for Inflation?

It appears that Republicans will take control of the House. However, the Senate is yet to be decided.

It could be a while before we learn the results of the Senate race, as the races are so close in states like Georgia that there may need to be a run-off election to determine the winner. This occurs in extremely tight races when neither candidate has 50% of the votes.

From an interest rate perspective, having the GOP take control of the House will likely create gridlock for Congress that could make passing spending bills difficult. Since spending is inflationary, gridlock is what the bond market wants to see.

Regardless of the ruling party, when one party is in control of the Presidency, House, and Senate we usually see excessive spending bills or tax cuts passed as they use the opportunity of majority control to push their party’s political agenda. The results of this election have eliminated that potential.

Tomorrow is a critical day for rates as we will get an update on consumer inflation from the Consumer Price Index (CPI) report. The hope is that inflation has peaked and is now heading lower. This would help keep rates from taking another step higher.

Mortgage bonds are currently battling their 20-Day moving average. Once again. This makes floating into tomorrow’s CPI report risky.

However, if you believe we will see lower inflation in tomorrow’s report, you may want to take the risk and float. 

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