Republicans' gain is short of wave as Biden dodges worst-case

• Biden out-performs historic midterm trends despite inflation
• DeSantis dominates in Florida, while Trump candidates falter

The Republican wave that was supposed to undo Joe Biden's presidency failed to arrive.

For weeks, GOP candidates were projected to dominate Tuesday's midterm elections, with polls showing voters bitter about the state of the economy. Party leaders acted emboldened, and Donald Trump openly teased an early announcement of a 2024 presidential run in hopes of harnessing the expected momentum.

Republicans do appear likely to win the House of Representatives, a perch from which they'll be able to block Biden's legislative agenda and harry his administration with investigations. But the GOP majority is on track to be narrow, and so many races remain undecided that a Democratic victory can't be ruled out.

The Senate is a different matter. Democrat John Fetterman won a Republican-held seat in Pennsylvania, and Republicans had yet to flip any Democratic seats. Democrats who Republicans had hoped were vulnerable, including New Hampshire's Maggie Hassan, held onto their seats.

Whatever the outcome, narrowly divided government in Washington will make it difficult for either party to advance its agenda. Wall Street and investors typically prefer legislative gridlock to new regulations and taxes. S&P 500 futures fluctuated slightly as midterm results were reported.

"Don't expect any big things to get done before 2025," former Republican Representative Tom Davis of Virginia, a moderate, said in an interview. "Just getting the budget passed without a shutdown and raising the debt ceiling are going to be hard."

Biden, despite his low approval rating and relative absence on the campaign trail, will likely be able to claim the best midterm performance for an incumbent president's party in 20 years, since George W. Bush's Republicans gained seats in the election following the Sept. 11, 2001, terrorist attacks. 

Delayed Celebration
That spells trouble for House GOP Leader Kevin McCarthy, whose plans for a victory celebration on Tuesday night were delayed by several hours with control still undecided. 

"When you wake up tomorrow, we will be in the majority and Nancy Pelosi will be in the minority," McCarthy told a dwindling group of supporters who waved signs and mostly empty beer bottles during the brief speech.

Should Republicans pull off a victory, McCarthy must wrangle an unwieldy caucus in which Trump's loyalists can play spoiler at every turn. It isn't a certainty that McCarthy would be elected speaker of the House, his longtime ambition, after falling short of expectations.

No Republican had a better night than Florida Governor Ron DeSantis, who crushed his Democratic re-election opponent by nearly 20 percentage points, helped flip three Democratic-held House seats in his state and even won Miami-Dade County, for decades a Democratic bastion in the state.

But voters across the country rejected efforts to codify Republican-backed efforts to restrict abortion rights, underscoring anger among moderate voters in the wake of the Supreme Court's decision overturning Roe v. Wade.

High-profile candidates Trump had endorsed, meanwhile, fell to Democrats in key races, including to Fetterman in Pennsylvania. Republican Kari Lake, who had modeled herself in Trump's style to attract his avid support, trailed Democrat Katie Hobbs by about 30,000 votes in the Arizona governor's race as of 6:30 a.m. on Wednesday. 

Democrats meanwhile flipped governor's mansions in Maryland and Massachusetts and held them in Pennsylvania and Wisconsin -- key victories for their party ahead of the 2024 presidential election, which is expected to be decided in part in those battleground states.

Likely Runoff
The former president is unlikely to be bowed by the results. His preferred candidate in the Georgia Senate race, former football star Herschel Walker, was locked in a tight race that by early Wednesday was on course for a likely runoff. Republican JD Vance, whom Trump also endorsed, won the race for an Ohio Senate seat.

Earlier Tuesday, Trump said in an interview with Newsmax he should not be blamed for Republican under-performance but that he should receive full credit for victories.

Even as Democrats celebrated their better-than-expected performance in the House – and held out hope for maintaining control of the Senate – the White House will in the coming days grapple with a Congress where gains will be hard-fought.

And if Democrats aren't able to hold on to the Senate, it would allow Republicans to block confirmation of Biden nominees for judicial and executive appointments.

'Crazy Divided'
Bill Daley, who was Barack Obama's White House chief of staff in 2011, when a standoff over the debt ceiling led to a credit downgrade of US government debt and a stock market slide, said the political atmosphere now "is tougher. It's been more crazy divided."

"It will necessitate a Herculean effort to see anything meaningful passed with the Congress that seems to be developing," said Daley, now vice chairman of Wells Fargo & Co.

Loss of one or both chambers intensifies pressure on congressional Democrats to act during a lame-duck session, with lawmakers expected to consider a bill that would shield same-sex marriage from a reversal at the Supreme Court. Democrats also hope to pass additional Ukraine funding before the end of the year and possibly a large increase in the federal debt limit to delay a standoff and potential first-ever default.

The White House, though, might prefer to confront Republicans over the debt ceiling as early as possible next year, either to force them to raise the borrowing limit or pin blame on the party for a default.

If Biden and House Republicans can work together on anything, the likeliest issue is energy. The White House has said it supports legislation to streamline permitting and leasing for energy projects, with US gasoline prices still elevated and a heating oil shortage looming in the northeast.

"I'd put energy at number one," said retiring Republican Representative Fred Upton. "No one likes high gas prices."

But sweeping antitrust legislation aimed at anti-competitive behavior by big tech companies faces opposition from McCarthy and his allies. Democrats won't realize ambitions to raise taxes on the wealthy and corporations, reinstate abortion rights and expand the social safety net with benefits like universal pre-K, child-care subsidies or restoration of an expanded child tax credit that helped slash the number of American children in poverty.

Republicans' resolve to cut federal spending also may complicate a US response to a potential recession, especially significant if there is a financial or debt crisis demanding aggressive intervention. Financial markets are blaring warnings of a downturn and private economists on average forecast a 60% probability within a year.

The Republican wave that was supposed to undo Joe Biden's presidency failed to arrive.

For weeks, GOP candidates were projected to dominate Tuesday's midterm elections, with polls showing voters bitter about the state of the economy. Party leaders acted emboldened, and Donald Trump openly teased an early announcement of a 2024 presidential run in hopes of harnessing the expected momentum.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.