Morgan Stanley analysts suggest that President Donald Trump’s immigration crackdown could lead to unexpected economic pressures, potentially prompting the Federal Reserve to implement steeper interest rate cuts. The crackdown, which includes deportations, visa denials, and ICE raids, is already impacting businesses, with one in five reporting employee losses, particularly in agriculture, hospitality, and tech sectors. This reduction in the labor force could slow job growth, with Morgan Stanley cutting its 2025 job growth forecast to 90,000 jobs per month from 125,000, citing slower labor force growth due to immigration restrictions.
A shrinking workforce may lower economic output, pushing potential GDP growth toward 1.5% by 2026, and increase unemployment, potentially necessitating rate cuts to stimulate the economy. Morgan Stanley now expects the Fed to hold rates steady in 2025 but begin cutting in March 2026, targeting a range of 2.5% to 2.75%, as immigration restrictions and tariffs could exacerbate inflationary pressures in the near term, keeping the Fed cautious.
However, some economists, like Wendy Edelberg from the Brookings Institution, warn that the crackdown could reduce consumer demand, particularly in immigrant-heavy communities, risking a mild recession rather than just inflation. This could further pressure the Fed to cut rates to counteract economic slowdown. A post on X from @KeySignals on May 31, 2025, reflects this sentiment, noting the crackdown’s potential to push the Fed toward steeper cuts, though such posts are not conclusive evidence.
The interplay of reduced labor supply, potential demand crashes, and tariff-driven inflation creates a complex economic environment, with Morgan Stanley indicating the Fed may need to navigate weaker growth with rate adjustments in 2026.
