PIMCO: What will Democrats prioritize in 2027?
In the latest Washington Watch, Libby Cantrill, PIMCO’s Head of Public Policy, discusses the results of the U.S. midterm elections and how the new Congress will respond to voters’ concerns. These are the key takeaways:
With votes still being counted, Democrats appear to be on track to hold their largest congressional majorities since 1990, likely flipping ~45 Republican House seats to net 260 Democratic House seats (218 needed to pass a bill) and winning 9 Senate seats, bringing the likely Democratic majority to 56 Senate seats (60 needed to break a filibuster, but 51 to pass via 'reconciliation'). Democrats ended up winning in places they had no idea they were competitive, and in some cases, where the Democratic candidates had suspended their campaigns for personal reasons but still won.
Of course, despite the decades-large wave and sizable Democratic majorities, there will still be several constraints on Democrats. President Trump will, of course, have veto authority, and for most legislation, Democrats will need 60 votes in the Senate to overcome a filibuster, meaning they would have to cooperate with Republicans to even get something on the president’s desk.
There are likely to be some issues with which Democrats can build enough of a coalition with Republicans to overcome a Trump veto, rendering Trump’s veto pen obsolete; a veto-proof majority requires 290 in the House, meaning cooperation with 30 Republicans should Democrats have 260 seats, and 67 in the Senate, suggesting 11 Republicans would have to support. In other cases, as Trump alluded to last night in his 60 Minutes interview, there may be some areas of possible compromise, including drug pricing and immigration.
The larger group of Democratic moderates, including the return of the Blue Dog Democrats from the Southeast and the Plains, as a voting bloc, should – at least theoretically – facilitate more room for bipartisanship and more dealmaking because future Speaker of the House Hakeem Jeffries in particular will not be hamstrung by the very progressive left (i.e., he can lose many progressive members and still pass legislation). See below for what we expect Democrats to focus on next year.
The current Republican-led Congress returns today for a few weeks before the end of this Congress, in which they are likely to have a full plate, if they don’t simply punt some of the issues to the next Congress.
Much focus will be on the bipartisan permitting bill, the Bipartisan American Affordability and Jobs Act, an idea that has been lingering for years (if not decades), to see whether it can get the 60 votes it needs to get out of the Senate (we think it can).
The BAAJA is expansive, and among other things, would reduce red tape for traditional energy and renewable projects, restrict any president from reversing course on permits that have already been provided by the federal government (this would apply to the wind projects that were underway but that Trump tried to stop), and would require data centers to provide their own power as well as subsidize any electricity increases for all data center projects of any size.
While fragile, many folks think this will clear the Senate, and if it gets sent to the House as a standalone, it will likely pass and be signed into law.
The prospects for the annual NDAA, the yearly bill to fund the Pentagon, as well as the government funding bill are murkier and there is a chance we could see a short government shutdown if the wheels really come off. The House is also likely to vote on impeaching Secretary of Defense Hegseth, which could very well pass the House but fall short of conviction in the Senate (which requires 67 votes to convict). We would not be surprised to see some resignations, however, before the end of the year, as confirmations will become much harder, if not impossible in the Senate come January.
Despite the heightened partisanship that we have seen over the last 20 years, it appears that Democrats will try to address the concerns of the 'median voter', which include: 1) affordability, 2) oversight, and 3) post-Watergate style, 'good government' reforms, which would seek to claw back the power of the presidency.
As we said last week, we continue to believe that the main risk to the data center buildout and prospects for AI regulation remain at the state level, not the federal level; in particular, all eyes should be on Texas, Ohio, Georgia, Michigan, Nevada, and Iowa, which will see new governors ascend to the governors' mansions who ran on a platform of restricting AI data centers, in particular.
Nevertheless, Congress’ priorities in January are likely to include:
1) Affordability
Based on exit polling, cost of living and inflation were the top issues for voters, with 62% of voters blaming higher prices on Trump’s policies, including the Iran war and tariffs, and 75% rating the economy 'poor'.
Given concerns that some of the Democratic gains could be lost in 2028, the Democrats will try to build veto-proof majorities where they can and dare Trump to veto legislation where they can’t to show voters that they are listening. As of now, some of the 'Day 1' priorities are likely to include:
- Rescinding the Canadian tariffs: This is likely to be one of the first bills Democrats put on the floor, and it would be surprising if it does not have the required veto-proof majorities. Given Canada is the U.S.'s second-largest trading partner and was a significant issue in many key Senate races, the reality is for many lawmakers, including Republicans, the Canadian tariffs are deeply unpopular and have caused many key inputs – aluminum, steel, and potash – to increase significantly. How narrow or broad the rescission remains to be seen, but this effort could be 'H.R. 1,' i.e., the first bill that Democrats put on the floor.
- Reinstating the expired enhanced Obamacare subsidies: While few voters named this the top issue, healthcare typically ranks as one of the top issues for voters and trying to reinstate some of the Medicaid cuts that go into effect in 2027 as well as restoring the enhanced Obamacare subsidies that expired at the end of 2025 (an issue the Democrats shut down the government over) will be a key priority. Unlike tariffs, these issues are unlikely to garner sufficient Republican support to overcome a veto, but watch it be one of the issues Democrats prioritize as part of the upcoming debt ceiling fight. We could also see Democrats use reconciliation – the process that allows certain legislation to pass with 51 votes – to try to force the president’s hand on these issues as well.
- Blocking funding for Iran: In voter exit polls, voters had a very dim view of the Iran war – 75% said it was a reason they were voting against Republicans – and the Iran conflict was mentioned both in the context of affordability as well as frustration over what they viewed as Trump turning his back on a key campaign promise. The easiest thing to do is simply not do anything – all it takes is for one chamber of Congress to refuse to pay. But in order to really constrain, the president, Democrats could use a funding bill to impose constraints, like what they did in 1975 with the Vietnam War. This could start in the lame duck but will extend to the new Congress. Our view is that Democrats may ultimately support more broad-based defense spending – particularly on ensuring munitions are restocked – but will use their leverage to get other priorities funded, as well as to bring the Iran conflict to an end.
- Other possible affordability priorities include expanded childcare tax credits as well as efforts to increase the minimum wage. These are likely to fail/get vetoed, but would provide Democrats a platform on which to run in 2028.
2) Oversight
As the party in power, the Democrats will wield significant oversight powers come January, which includes:
1) setting the committee agenda and controlling what is investigated and how floor time is used;
2) possessing subpoena authority, which will allow Democrats to require people – from the administration to corporate America – to testify (publicly or privately), to demand documents (emails, memos, etc.) from the administration, as well to enforce against those who do not cooperate (allowing them to hold those who do not cooperate in contempt of Congress); and
3) using other tools – the power of the purse, impeachment, gating confirmations, as well as working with the Offices of Inspector General and the GAO to audit the administration.
The oversight agenda is likely to be broad and deep, but for our purposes, some of the focus will include:
- Banking / Big Tech /Mergers: With Senator Elizabeth Warren at the helm in particular, we should expect an active oversight agenda, which is likely to focus on Big Tech (Jensen Huang being an even likelier subject now) as well as general corporate consolidation among banks; investigating the administration’s ties to crypto and prediction markets; looking at private equity practices; and investigating the administration’s efforts to defund the Consumer Financial Protection Bureau (CFPB).
- Tax: There will also be significant oversight activity on the tax front, with incoming Senate Finance Chair Ron Wyden (D-OR), to look at everything from the 'tax-aware' trading strategies, the use of certain federal tax credits by data centers, and individual tax avoidance by billionaires, in particular. We could also see at the tax-writing committees lay the groundwork for policy come 2029, including legislation on capital gains, eliminating 'step-up in basis', and an increase in the corporate tax rate from 21%, all of which we think will be on the table, particularly as it relates to shoring up Social Security (2032 is the most recent deadline).
- But, but, but: More sizzle than steak. Remember, that while oversight hearings can – and will – create splashy headlines, they don’t have the power of law, so much of this will be more bark than actual bite (for now, at least).
3) 'Good government' reforms: For those students of history (or who may have actually lived it), you will remember that after Watergate, the Nixonian era, and the 1974 midterms, Congress made significant efforts to reform government and to clarify / limit the powers of the executive branch. We think similar efforts could unfold this Congress and because Republicans fear what could be a trifecta of Democratic control after the 2028 election, they may actually cooperate to provide veto-proof majorities. A bill to ban all individual stock trading for members of Congress and the Administration could likely be the first order of business, but clawing back the president’s emergency authorities under the International Emergency Economic Powers Act and clarifying/protecting independent agencies (e.g., the Fed, FTC, SEC, etc.) from executive branch intervention, among others, could be priorities as well.
Bottom line
We should expect to see a much more assertive Congress in 2027 than we have seen in recent history (under both Trump and President Biden) with a focus – and mandate – to govern to address voters’ concerns, including cost of living, the Iran conflict, and the general sense that the executive branch’s powers have grown unchecked. While Democrats will come to office with much more substantial majorities, President Trump – and Republicans – will still be an obstacle to getting through at least some of their agenda.
With that said, there are several crossover issues that Republicans – particularly those who may feel more vulnerable going into 2028 – may support, so we may actually see the next Congress achieve more than many expect. And, as many Democrats have already flagged, a big risk will be that our thermostatic politics swing back in 2028 if Democrats don’t govern and/or go too far to an extreme.