With the swearing-in of members of the 119th Congress on January 3, Republicans now control both the Senate and the House of Representatives. When President-elect Donald Trump takes the oath of office on January 20, Republicans will have full control of Washington for the first time since 2018.

The president-elect and Republican leaders on Capitol Hill have outlined a massive policy agenda, including sweeping immigration reforms, wide-ranging tariffs on imports, a massive tax bill, major cuts to government spending, raising the debt ceiling and more—all of which could have a significant impact on the economy, the markets and investors. But narrow margins in Congress and internal party divisions could complicate that agenda.

Here's a look at the political lay of the land as 2025 begins, and how key policy issues may unfold in the coming months.

Republicans will have a manageable 53-47 majority in the Senate. That's far short of the 60-vote supermajority needed to bypass a filibuster, however, and there are perhaps a half-dozen Republican senators with independent streaks that could buck the party line on occasion.

But it's the House of Representatives where Republicans' biggest challenges lie. The year began with Republicans holding a narrow 219-215 margin, with one vacancy. But two sitting House Republicans have been nominated for positions in Trump's administration—Rep. Mike Waltz (R-Fla.) as national security advisor and Rep. Elise Stefanik (R-N.Y.) as ambassador to the United Nations. Both will resign from Congress once they are confirmed later this month, leaving two additional vacancies. That will leave Republicans with a razor-thin 217-215 majority until the vacancies are filled via special elections in April. That is a one-seat majority; if Democrats stay unified and a single Republican votes with them on a bill, the resulting 216-216 tie means the bill is defeated under House rules. Keeping all House Republicans on the same page has proven enormously difficult over the past two years, but that's what will be needed to move forward on legislation.

Republicans plan to use budget reconciliation to approve their priorities. It's a parliamentary process designed to expedite consideration of budget-related legislation. Crucially, it can be passed by both chambers with a simple majority vote, bypassing the need for a 60-vote supermajority in the Senate, where the package cannot be filibustered. It's a common strategy when there is unified government in Washington. Republicans used it in 2017 to pass the Tax Cuts and Jobs Act, the sweeping tax-cut bill that was a hallmark of Trump's first presidency. Democrats used it in 2021 to pass the American Rescue Plan, the $1.9 trillion post-COVID economic stimulus package, and again in 2022 to approve the Inflation Reduction Act, which lowered some prescription drug prices and boosted green energy, among other provisions.

Recent weeks have seen an internal debate among Republicans about whether to pass one gigantic bill under the budget reconciliation process or two smaller ones. House Republican leaders, cognizant of their tiny majority, have pushed the one-bill strategy, arguing that a massive bill that encompasses taxes, border security, government spending cuts, a debt ceiling increase, energy measures and other priorities stands a more realistic chance of passing the House.

Some Republican senators, however, have advocated for a two-bill approach, favoring quick passage of a bill with immigration/border, energy and other provisions that puts a win on the board in the first 100 days of the new administration. That would allow more time to negotiate a second, more complicated bill that deals with taxes, government spending and the debt ceiling, which could be approved later in the year.

Trump said recently that he favored the one-bill strategy, but the next day indicated he would also be open to the two-bill approach. Republican leaders will be sorting this out in the coming weeks.

Trump made tariffs a cornerstone of his campaign, promising to impose across-the-board tariffs of 10% to 20% on all imports. He has called for tariffs as high as 60% on imports from China. Presidents have broad authority to impose tariffs, so expect executive orders putting tariffs in place within the first few days of the administration.

But economists generally agree that tariffs, which are not paid by foreign countries but by U.S. companies that import goods and materials from overseas, can increase inflation and impede economic growth. Consumers tend to bear the brunt of tariffs, as companies pass on the cost by increasing prices.

For that reason, there is widespread belief in Washington that the tariffs implemented by the new administration may be more targeted, rather than applying to every import. And the president-elect showed in both his first term that he is willing to use tariff threats as a negotiating tactic. His trade policy in his first term ultimately yielded an agreement with China, as well as the US-Mexico-Canada Trade Agreement (USMCA). More recently, Trump's December threats to increase tariffs on Canadian imports has sparked dialogue between the two nations.

Another pillar of Trump's presidential campaign was a crackdown on illegal immigration. Expect a series of executive orders on Day One of his presidency on immigration and border security, including the launching of a massive deportation effort. But deportation of millions of undocumented immigrants will be logistically difficult, costly and likely will face time-consuming legal challenges.

There are also potential economic impacts. Among the estimated 10 million to 11 million undocumented immigrants currently in the United States, an estimated 8.3 million are employed. Businesses that rely on immigrant workers, such as agriculture, construction and hospitality, could be particularly affected.

Companies of all types will be watching carefully as details of the new administration's trade and immigration policies are unveiled. 

Major tax legislation is a given in 2025. That's because all of the 2017 tax cuts are set to expire at the end of the year, including lower individual income tax rates, the higher standard deduction, the higher amount of assets that can be inherited without triggering the estate tax, and dozens of other provisions. Republicans plan to extend the expiring provisions, though the price tag is high: an estimated $4.6 trillion over 10 years, according to the nonpartisan Congressional Budget Office. An extension for a shorter time period—perhaps five years—could be on the table to reduce the budget impact.

But an open question is what else could be included in a tax-cut package. During the campaign, Trump touted a variety of ideas, including ending the taxation of tip income, eliminating taxes on Social Security benefits, cutting the corporate tax rate, ending taxes on overtime hours, lifting the cap on the state and local tax (SALT) deduction, and more. Including all these ideas is not realistic, but eliminating the tax on tip income is a reportedly a top priority for the incoming administration. The SALT tax deduction debate will also be one to watch, as Republican lawmakers representing districts in high-tax states like California, New Jersey and New York have said they won't support a tax bill that does not include an increase in the current $10,000 cap.

Trump is launching the Department of Government Efficiency (DOGE), a nongovernment agency headed by businessmen Elon Musk and Vivek Ramaswamy that is tasked with identifying potential cuts to government spending. The DOGE does not have any authority to make cuts but will make recommendations to the president and Congress. Musk has said he believes $1 trillion to $2 trillion in spending can be eliminated. The DOGE may run into resistance in Congress, where lawmakers are likely to be wary of imposing cuts that directly impact their own constituents. But there's no question that there is a considerable amount of wasteful spending in the federal government and those areas are likely to be the first targets of the effort.

Reducing spending will be critical to paying for the tax cuts and other priorities of the new administration. But whether the DOGE can find enough palatable cuts that can be approved by Congress remains to be seen.

The debt ceiling, the congressionally mandated cap on the total amount of debt the United States can accumulate, was suspended in mid-2023 as part of a bipartisan agreement. But that suspension expired on January 1, 2025. Treasury Secretary Janet Yellen told Congress in late December that the Treasury Department would begin taking "extraordinary measures" later this month in order to ensure the nation does not default on its debts. Those measures are temporary, typically buying Congress four to six months of additional time. By mid-2025, Congress will have to raise the debt limit, something that will be tricky in an all-Republican Congress.

Debt ceiling battles have been ferocious in Congress in recent years, with the debt recently exceeding $36 trillion. In 2023, Congress came within a day or two of the first-ever U.S. default before a last-minute bipartisan deal was reached to suspend the debt ceiling. Market volatility has typically increased if there is uncertainty about when and whether Congress will lift the cap.

Republican leaders have said that they will increase the debt ceiling as part of the broader tax-and-spending legislation later this year. But that approach could force some Republicans into a difficult position. Seventy-one House Republicans voted against the debt ceiling agreement in 2023. A handful of congressional Republicans have never voted for a debt ceiling increase. That creates an uncertain atmosphere as another vote approaches this year. Democrats, who typically provide significant votes on debt ceiling legislation, have little incentive this year to be as accommodating as the minority party in both chambers.

Yet despite years of complaints and frustration on Capitol Hill, Congress has never failed to raise or suspend the debt ceiling before the default date. While the exact path to that end in 2025 remains unclear, expect lawmakers to ensure default is avoided once again.

While the issues outlined here will undoubtedly impact the economy and the markets, it's hard to say now exactly how. On issues like immigration and tariffs, the incoming administration has yet to unveil the details—and those details will matter. On Capitol Hill, it will take Republicans several weeks to outline the parameters of any legislation, and potentially months more to negotiate the details and pass it through both the House and the Senate. The specifics will change many times over the course of the next several months.

Investors should be wary of making any major portfolio changes based on reporting about what might be in any legislation. Market volatility may increase around reports of what is or is not included in executive orders and legislative proposals, but the details are likely to change. Negotiations will result in some provisions being cast aside and compromises being made in other areas. Geopolitical events may intervene. There will be time to understand the specifics of any legislative or regulatory proposals before they take effect. A well-diversified portfolio will remain appropriate as a busy year in Washington unfolds.