In This Article:
A flurry of tariff headlines has greeted investors over the past month. But some Wall Street economists have argued that President Donald Trump's immigration policies, which include mass deportations, could be just as meaningful to the path of inflation, monetary policy, and the overall market narrative.
"Investors are focused on the twists and turns of tariffs, but we think immigration policy deserves more attention," Morgan Stanley chief US economist Michael Gapen wrote in a note to clients on Thursday. "The macro effects of immigration restriction could be just as consequential."
Read more: What are tariffs, and how do they affect you?
Increased immigration helped drive the US economy over the past several years, boosting the labor force and overall economic growth. From 2022 to 2024, an average of 3 million people immigrated to the US each year. Given Trump's focus on limiting immigration, Morgan Stanley assumes this number will fall to 1 million this year and 500,000 in 2026.
Morgan Stanley believes this will bring GDP down from a range of 2.5% to 3% seen over the past few years to 2% this year and 1% to 1.5% next year. That could have implications for the stock market. Many equity strategists made bullish calls on stocks this year based on the assumption that the economy will continue at a rate above 2% in 2025.
Lower immigration levels could also keep inflation sticky. In theory, the labor force would grow more slowly, boosting competition in the job market and forcing employers to increase wages to attract and retain talent.
In Yahoo Finance's latest Chartbook, Oxford Economics lead US economist Nancy Vanden Houten noted that deportations could also play a role in slowing labor force growth and therefore boost wages and inflation.
"While much of the discussion on immigration has focused on the surge in the last few years, in most industries where the foreign-born are overrepresented, more than half of noncitizen immigrants have been in the US for more than 10 years," Vanden Houten told Yahoo Finance. "Employers in these industries could face significant labor shortages in the event of mass deportation, which could put upward pressure on wages and inflation."
For investors, the key question surrounding any Trump policy is how far it could stunt economic growth or boost inflation and what that could ultimately mean for the Federal Reserve's interest rate path.
As of now, Gapen and Morgan Stanley believe immigration curbs could help drive the Fed to cut rates just once this year. And while not the base case, when considering why the Federal Reserve could eventually lean toward hiking interest rates, RBC Capital Markets head of US rates strategy Blake Gwinn told Yahoo Finance immigration, not tariffs, would be the most likely driver.