Bank of America sees stagflation, not recession – and no rate drop this year. It is because of 2 specific Trump policies

The Bofa team, led by the main American economist Aditya Bhave, cited two main administration policies of Trump as key factors of their appeal: new immigration restrictions and a new series of import rates.

Why is not a recession, according to Bofa

First, Bhave’s team turned to the July job report which amazed Wall Street with a net revision of 258,000 wages for May and June. It is the second largest in modern history outside the initial pandemic shock and the largest ever ever reduced by a non -recession year, according to the calculations of Goldman Sachs. But Bofa’s strategists argue that this does not spend the recession. In fact, the knot of their argument, they say, is that “the markets confuse the recession with stagflation”.

The key distinction comes down to Labor supply, Not just demand. Research highlights a strong contraction in the workforce born abroad – out of 802,000 since April – because the immigration policy has tightened considerably. This compression on the side of the supply pushes against the demand for lower labor, now measures that should indicate the relaxation of work, such as the unemployment rate and the vacant posts to the unemployed – unemployed – especially stable in the past year. Bank of America estimates that employment growth at age, which means that the hiring rate necessary to maintain stable unemployment will only reach 70,000 per month this year.

The recent comments by President Jerome Powell support this interpretation, said Bofa. Even if the growth of the payroll slows down, the Fed now considers the labor market to “full employment” as long as the unemployment rate does not increase. In July, unemployment increased to 4.25% against 4.12%, but remains in the levels linked to the beach.

Other economists do not agree with this evaluation. A team of UBS said that the labor market showed signs of “dropout speed”, with an average work week of 34.25 hours in July – the levels of will 2019 and far from “stretching” which is typical when the labor markets are tight due to workers’ shortages. Industry data also show that job losses are not concentrated in sectors with a large immigrant workforce, supporting the opinion more that Slack comes from weakened demand, not from a tenders.

On the other hand, the Bofa still sees the demand for labor standing upwards and highlighted the average growth in hourly profits of 3.9% over a year in July, and overall of the weekly payrolls increasing by 5.3%.

The debate on demand in relation to the supply is essential because the answer will determine how the Fed reacts to stagflationary signals.

Bofa explained how two Trump policies feed the mixture of stagnant growth and inflation brewing that could bring America in the 1970s.

Policy N ° 1: Immigration restrictions

Trump changes to immigration have discreetly but considerably stifled the supply of labor. Bofa said it happened earlier than expected, and they pointed out that the collapse of the workforce born abroad has more than offset the gains among workers born in the country-even if the latter represent more than three-quarters of the total workforce.

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The sectors which depend strongly on the workforce of immigrants, such as construction, manufacturing and hospitality, have experienced disproportionate job losses. These three represented 46,000 of the down data revisions of May and June.

“The wage bill of construction stopped this year, the manufacturing has decreased for three consecutive months and leisure and hospitality added only 9,000 jobs in total in May and June,” said Bofa.

It is notable because leisure and hospitality were a strong place in the labor market in 2023-24.

Politics n ° 2: Climbing of prices

The second pillar of stagflation comes from a new series of import rates, especially on Chinese products. Since July 4, the effective overall American rate has increased to around 15%.

Bank of America’s economists warn that prices are starting to appear in inflation data: the basic prices of goods excluding cars increased by 0.53% in June, the fastest in 18 months.

Above all, the inflation of the underlying PCE remains blocked above 2.5%-well above the objective of the Fed. With long -term expectations anchored for the moment, political decision -makers are wary of reduction rates before there is clear evidence that inflation has peaked. Some regional fed presidents warned that the tariff effect could last deep in 2026.

Risks for the Fed: Cut now could turn against him

The markets are currently pricing a quarter of a point in September. But Bank of America says that the cuts next month would be risky, especially if the job market is tight due to providenot request. Reduction rates too early could undermine the Credibility of the Fed if inflation is just accelerating in response, forcing a rapid reversal.

The research note concludes that as long as the August job report provides a strong increase in unemployment – in particular above 4.4% – or inflation is unexpectedly opposed, the Fed should hold stable until the end of the year. Any rate reduction decision would now require “to trust more in a forecast of the deterioration of the labor market and transitional tariff effects than in the data in progress”, write the strategists.

For this story, Fortune Used a generative AI to help an initial project. An editor checked the accuracy of the information before the publication.