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President Donald Trump's immigration crackdown is emerging as a key factor influencing U.S. monetary policy. While his tariff measures face legal hurdles, Morgan Stanley analysts say immigration restrictions are already shaping economic forecasts and could lead to deeper Federal Reserve interest rate cuts.
In a recent note, Morgan Stanley lowered its immigration forecast to 800,000 for 2025 and 500,000 for 2026, signaling a sharper decline than previously expected. This slowdown is projected to suppress population and labor force growth, keeping the labor market tight even as job growth slows. According to the bank’s tracker, population growth could fall to 0.4% in 2025 and 0.3% in 2026, while labor force expansion may ease to 0.7% this year and 0.5% next year.
The tight labor market, driven by low immigration, may prevent the Fed from interpreting slower employment gains as economic weakness. Instead, with U.S. potential growth estimated to decline to 2.0% in 2025 and possibly 1.5% by 2026, Morgan Stanley suggests the neutral interest rate will also fall. This would give the Fed more room to cut rates once it begins easing, with a projected policy rate trough of 2.50–2.75% by 2026.
Meanwhile, Trump’s trade policy remains uncertain amid ongoing legal battles over IEEPA-based tariffs. However, the administration may re-establish tariffs using other legal pathways, albeit at a slower pace. Analysts still expect a gradual tariff increase in 2025 and 2026, which could further dampen economic activity.
Recent data supports this cooling trend: Q1 GDP growth was revised to a -0.2% annualized rate, and hiring has slowed without collapsing. With tight immigration policy offering certainty, its structural impact on the labor market may ultimately steer the Fed toward a more aggressive rate-cutting path.
