Bank of America Research economists remain firmly convinced that the Fed will not lower interest rates in 2025 despite recent disappointing employment data that intensify market speculation about the imminent policy shift. The reason is that the U.S. economy is in a fight against stagnation (not recession), and the slowdown could worsen the toxic mixture of stagnation and inflation, according to a new study.
The Bank of America team, led by senior U.S. economist Aditya Bhave, sees two major Trump administration policies as key factors for them: tough new immigration restrictions and a series of new import tariffs.
BOFA says why it’s not a recession
First, Bhave’s team turned July’s work report shocked Wall Street Net revisions for May and June were 258,000 salary. It was the second largest pandemic shock in modern history and the biggest year of all time. Goldman Sachs Calculation. But Bank of America strategists believe this does not mean a recession. In fact, the crux of their argument is that “the markets merge recession with scatter.”
The key difference comes down to Labor supply, Not only requested. The study shows that a huge contraction in foreign-born labor has been tightened significantly as immigration policies have tightened – a drop of 802,000 since April. This supply-side squeeze is driving weak labor demand, making indicators that should indicate labour slackness, such as unemployment and the ratio of job openings to unemployed workers, have been largely flat over the past year. Bank of America estimates that job growth in branches means the hiring rate needed to keep unemployment stable, which can only reach 70,000 per month this year.
BOFA said Jerome Powell’s latest comments support this explanation. Even if wage growth will drop to zero, the Fed now sees the labor market as “full employment.” In July, the unemployment rate accounted for 4.25% of people with 4.12%, but was still within the range of the range.
Other economists disagree with the assessment. A UBS team said the labor market is showing “Stall speed“The average working week in July was 34.25 hours – the 2019 level, away from the typical “stretching exercise”, which is typical when the labor market is tight due to workers shortages. Industry-specific data also suggest that job losses are not concentrated in sectors with larger immigrant labor, further supporting the low view, thus making demand weaker than supply constraints, rather than supply volumes.
By contrast, BOFA still sees continued growth in labor demand, noting that average hourly income rose by 3.9% in July and a total weekly wage increase of 5.3%.
The debate on demand and supply is crucial, as the answer will determine the Fed’s response to the signal of stagnation.
BOFA explains how two Trump policies push brewing combinations that could bring the United States back to the 1970s stagnant growth and inflation.
Policy 1: Immigration restrictions
Trump’s changes to immigration have quietly but have severed the labor supply. This happened earlier than they expected, BOFA said, pointing out that the collapse of foreign-born labor has far exceeded the income of locally born workers, although the latter accounts for more than three-quarters of the total labor force.
Bank of America Research
Sectors that rely heavily on the immigrant labor force, such as construction, manufacturing and hospitality, have caused disproportionate unemployment. These three account for 46,000 of the declines in the May and June data.
“Construction wage payments have stalled, manufacturing has declined for three consecutive months, with leisure and hospitality only adding 9,000 jobs in May and June,” Bofa said.
This is worth noting, as leisure and hospitality are a strong position in the labor market in 2023-24.
Policy #2: Tariff Upgrade
The second rigid pillar comes from new import tariffs, especially Chinese goods. Since July 4, the overall effective U.S. tariff rate has jumped to about 15%.
Bank of America economists warned that tariffs began to appear in inflation data: Prices of core commodities that exclude cars rose 0.53% in June, the fastest in 18 months.
Crucially, potential core PCE inflation is still above 2.5%, far above the Fed’s target. Currently, policy makers are alert to the speed of cuts before clear evidence that inflation has reached its peak, due to long-term expectations. Fed presidents in some regions have warned that the tariff effect may continue until 2026.
The Fed’s Risk: Cutting Now May Backfire
Currently, the market is priced until one quarter of September. But Bank of America says cuts next month are risky — especially if the labor market is tight due to the labor market supplyno Require. If inflation just accelerates rapidly, forcing a quick reversal, lowering interest rates too early may undermine the Fed’s credibility.
The study concluded that the Fed could remain stable by the end of the year unless the August job report caused a sharp rise in unemployment (especially above 4.4%) or unexpectedly softened inflation. Strategists write that any move to lower rates now requires “more belief in the effectiveness of labor market deterioration and temporary tariffs than the data at hand.”
For this story, wealth Use the generated AI to help with the initial draft. The editor verified the accuracy of the information before publishing.
