Bank of America Research economists remain convinced that the Federal Reserve will not lower interest rates in 2025, despite a recent wave of disappointing job data that stimulates market speculation about immediate change in politics. The reason, according to a new research note: the American economy is aimed at battle with staglation – not recession – and cutting rates can aggravate that toxic mixture of stagnation and inflation.
The Bofa team, led by senior US economist Aditia Baway, said the two largest Trump administration policies as key factors in their call: Heavy new restrictions on immigration and fresh import tariffs.
Why is it not a recession, according to Bofa
First, the first things, the Baby team turned to The July report that delighted Wall Street with a net downward revision of 258,000 salaries for salaries for May and June. This is the second largest in modern history outside the initial pandemic shock and the largest ever recession ever, according to Goldman Sachs’ calculations. But Bofa’s strategists argue that this does not write a recession. In fact, the essence of their argument, they say, is that “markets lead the recession with staglation.”
The key difference comes down to Supply of work, Not just demand. The study points to sharp contraction in the workforce born abroad-from 802,000 from April-while immigration policy has been dramatically tightened. This supply of supply is imposed against the weaker demand for labor, maintaining metrics that should indicate labor-like the unemployment rate and the relationship of vacancies with unemployed workers-on a flat year. Bank of America estimates that the growth of the break, which means the employment rate needed to maintain unemployment stable, will only reach 70,000 per month this year.
Recent comments on the Jererom Powell chair support this interpretation, Bofa said. Even if wage growth slows down to zero, the Fed now considers the labor market of “full employment” until the unemployment rate is increasing. In July, unemployment reached 4.25% from 4.12%, but remains at the level of the range.
Other economists disagree with this assessment. A team in UBS said the labor market shows signs of “Stall speed“With a subdued average work week of 34.25 hours in July-to the 2019 level and far from” stretching “that is typical when labor markets are tightened due to the lack of workers. Industry -specific data also shows that job losses are not concentrated in sectors with large immigrants working bodies, which further support the view that the Slack comes from weak demand, not for supplying.
In contrast, Bofa is still looking at the demand for labor and indicated the average increase in earnings of 3.9% year by year in July, and aggregate weekly salaries increase by 5.3%.
Debate on demand versus offer is crucial because the answer will determine how the Fed responds to staglation signals.
Bofa explained how Trump’s two policies encourage the blend of stagnant and inflation that America could take in the 1970s.
Politics #1: Immigration restrictions
Trump’s changes in immigration have quiet, but dramatically suppressed by the labor supply. Bofa said this was happening earlier than they expected, and they noticed that the collapse in the workforce abroad had more than compensation for the benefits of the natives-born workers-although the latter had more than three-quarters of the total labor force.
Research by the Bank of America
Sectors that rely on immigrant labor, such as construction, production and hospitality, have seen disproportionate job losses. These three participated with 46,000 of the Data Data Data from May and June.
“The salaries of wages have stopped this year, production has dropped by three consecutive months, and free and catering added only 9k jobs in May and June,” Bofa said.
This is important because free time and hospitality were a strong place in the labor market in 2023-24.
Politics #2: Tariff escalation
The second pillar of staglation comes from a new round of import tariffs, especially Chinese products. Since July 4, the overall effective tariff rate in the United States has risen to about 15%.
Bank of America’s economists warn that tariffs are starting to appear in inflation data: basic prices of goods, excluding Auto, increased by 0.53% in June, the fastest in 18 months.
Key, the basic inflation of the PCE core remains over 2.5% – well above the Fed goal. With long -term expectations anchored so far, policy makers are wary of cutting rates before there is clear evidence that inflation has reached peak. Some regional Fed presidents warned that the tariff effect could last in 2026.
Fed Risks: Cutting can now be pulled out of fire
Markets are currently valued in a quarter-point reduction by September. But the Bank of America says the next month’s reduction would be risky – especially if the labor market is narrow supplyno Demand. Cutting rates can undermine the Fed credibility too early if inflation simply accelerates in response, forcing a quick turnaround.
The research note concludes that unless the job report in August does not bring a sharp rise in unemployment – specifically over 4.4% – or inflation unexpectedly softens, the Fed is likely to be stable by the end of the year. Every move to reduce rates will now demand “to invest greater faith in the forecast for deteriorating the labor market and the effects of transient tariffs than in the data in hand,” strategists write.
For this story, Wealth Used generative AI to assist in the initial draft. The editor has confirmed the accuracy of the information before the publication.
Source link
