LIVE MARKETS-Immigration restrictions could be just as consequential as tariffs - Morgan Stanley
Morgan Stanley analysts warn that immigration restrictions could significantly impact the U.S. economy, potentially slowing immigration to 1 million in 2025 and 500,000 in 2026. This decline may reduce GDP growth to around 2.0% in 2025 and 1.0-1.5% in 2026. The report highlights that post-pandemic immigration has been crucial for economic recovery, and tighter immigration policies could lead to prolonged tight monetary policy from the Federal Reserve. The brokerage has adjusted its forecast for Fed rate cuts to a single 25 basis-point cut in 2025 due to uncertainties surrounding tariff policies.
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IMMIGRATION RESTRICTIONS COULD BE JUST AS CONSEQUENTIAL AS TARIFFS - MORGAN STANLEY
While investors are focused on the twists and turns of President Trump’s tariff policies, the macro effects of immigration restriction could be just as consequential, Morgan Stanley analysts said.
Morgan Stanley predicted that immigration could slow to about 1 million in 2025 and 500,000 in 2026 and added that this slowdown would likely reduce potential U.S. GDP growth to around 2.0% in 2025 and 1.0-1.5% in 2026.
Post-pandemic, immigration surged to 3 million per year, boosting both supply side and demand side in the U.S. economy, with supply effects being more significant. This influx played a crucial role in helping the economy achieve a “soft landing” after a period of high inflation, the analysts noted.
Positive supply shocks are marked by strong growth and falling inflation, but slower immigration flows could reverse this trend, Morgan Stanley analysts said on a note dated February 20.
During his first week in office, President Donald Trump signed a series of executive orders on immigration and issued numerous directives to fulfill his pledges of mass deportations and enhanced border security.
Immigration restrictions that keep inflation high and labor markets tight could result in the Federal Reserve maintaining its tight monetary policy for an extended period, compared to a scenario without such controls.
“We are not suggesting the Fed should be thinking about raising rates. Instead, our interpretation of the sensitivity analysis is that tighter immigration policies could keep the Fed in its currently restrictive stance for longer, particularly if adverse supply effects outweigh adverse demand effects over time”.
The brokerage recently revised its stance on Fed rate cuts to a single 25 basis-point interest rate cut in 2025, citing uncertainty from Trump’s tariff policy.
(Joel Jose)
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