President Adams's style was largely to leave domestic matters to Congress and to control foreign policy himself. Not only did the Constitution vest the President with responsibility for foreign policy but perhaps no other American had as much diplomatic experience as Adams. As a result of his outlook, much of his domestic policy was intertwined with his foreign policy, for diplomatic issues often sparked a domestic reaction that consumed the President and the nation.

On the heels of the XYZ Affair (see Foreign Affairs section), there were many negative sentiments toward the French. Sensing this mood in the citizenry and identifying an opportunity to crush the pro-French Democratic-Republican Party of Thomas Jefferson, the Federalist-dominated Congress drafted and passed the Alien and Sedition Acts during the spring and summer of 1798. Adams signed the legislation into law. These acts were made up of four pieces of legislation that became the most bitterly contested domestic issue during the Adams presidency.

Supposedly created as a means of preventing the aiding and abetting of France within the United States and of obstructing American foreign policy, the laws in actuality had domestic political overtones. Three of the laws were aimed at immigrants, most of whom tended to vote for Democratic-Republican candidates. The Naturalization Act lengthened the residency period required for citizenship from five to fourteen years. The Alien Act, the only one of the four acts to pass with bipartisan support, allowed for the detention of enemy aliens in time of war without trial or counsel. The Alien Enemies Act empowered the President to deport aliens whom he deemed dangerous to the nation's security. The fourth law, the Sedition Act, outlawed conspiracy to prevent the enforcement of federal laws and punished subversive speech—with fines and imprisonment. There were fifteen indictments and ten convictions under the Sedition Act during the final year and a half of Adams's administration. No aliens were deported or arrested although hundreds of alien immigrants fled the country in 1798 and 1799.

To pay for the military measures it enacted during the XYZ crisis, the Federalist Congress enacted heavy new stamp and house taxes. Farmers in eastern Pennsylvania rioted and attacked federal tax collectors in an incident later referred to as Fries's Rebellion. They believed that the new taxes were designed to support a large standing army and navy, which they opposed. Several of their leaders were arrested and sentenced to death for treason. However, on the eve of the election of 1800, Adams pardoned all of the prisoners.

In response to the Federalists' draconian use of federal power, Democratic-Republicans Thomas Jefferson and James Madison secretly drafted a set of resolutions. These resolutions were introduced into the Kentucky and Virginia legislatures in the fall of 1798. Jefferson and Madison argued that since the Constitution was created by a compact among the states, the people, speaking through their state legislatures, had the authority to judge the legitimacy of federal actions. Hence, they pronounced the Alien and Sedition Acts null and void. (See the Campaign and Election of 1800 section for more on the political effects of these actions and reactions.)

Although no other states formally supported the resolutions, they rallied Democratic-Republican opinion in the nation. Most importantly, they placed the Jeffersonian Republicans within the revolutionary tradition of resistance to tyranny. The resolutions also raised the issue of states' rights and the constitutional question of how conflict between the two authorities would be resolved short of secession or war.