Introduction to the Economic Forecast
The Federal Reserve is not expected to cut interest rates in 2025, according to Bank of America Research economists. Despite recent disappointing jobs data, the economists believe that the U.S. economy is heading towards a battle with stagflation, not recession. Stagflation is a toxic mix of stagnation and inflation, and cutting interest rates could worsen this situation.
Why It’s Not a Recession
The Bank of America team, led by senior U.S. economist Aditya Bhave, cites two major Trump administration policies as the key factors in their call: tough new immigration restrictions and a fresh series of import tariffs. The July jobs report, which stunned Wall Street with a net downward revision of 258,000 jobs for May and June, does not spell recession, according to BofA’s strategists. They argue that markets are conflating recession with stagflation, and that the key distinction comes down to labor supply, not just demand.
The Impact of Immigration Restrictions
The sharp contraction in the foreign-born labor force, down by 802,000 since April, is pushing against weaker labor demand, keeping metrics such as the unemployment rate and the ratio of job vacancies to unemployed workers basically flat for the past year. Sectors that rely heavily on immigrant labor, like construction, manufacturing, and hospitality, have seen disproportionate job losses. For example, construction payrolls have stalled out this year, manufacturing has declined for three consecutive months, and leisure and hospitality added just 9K jobs in total in May and June.
The Effect of Tariff Escalation
The second pillar of stagflation comes from a new round of import tariffs, particularly on Chinese goods. Since July 4, the overall effective U.S. tariff rate has jumped to about 15%. Bank of America’s economists warn that tariffs are starting to show up in the inflation data, with core goods prices excluding autos rising 0.53% in June, the fastest in 18 months. Underlying core PCE (personal consumption expenditures) inflation remains stuck above 2.5%, well above the Fed’s target.
Risks for the Fed
Markets are currently pricing in a quarter-point cut by September, but Bank of America says cuts next month would be risky, especially if the labor market is tight owing to supply, not demand. Cutting rates too soon could undermine the Fed’s credibility if inflation simply accelerates in response, forcing a swift reversal. The research note concludes that unless the August jobs report brings a sharp rise in unemployment, specifically above 4.4%, or inflation softens unexpectedly, the Fed is likely to hold steady through the end of the year.
Conclusion
In conclusion, the Bank of America Research economists believe that the U.S. economy is heading towards a battle with stagflation, not recession. The tough new immigration restrictions and the fresh series of import tariffs are the key factors driving this forecast. The Federal Reserve is not expected to cut interest rates in 2025, as cutting rates could worsen the situation. The economy is expected to remain in a state of stagnation and inflation, and the Fed is likely to hold steady through the end of the year.
