Over the past month, investors have been preoccupied with tariff-related news. However, economists from Wall Street suggest that President Donald Trump's immigration policies, which involve mass deportations and restrictions, could have a profound impact on inflation, monetary policy, and market trends. Increased immigration has significantly contributed to the US economy in recent years, enhancing the labor force and economic growth. With anticipated reductions in immigration numbers, analysts predict a slowdown in GDP growth, affecting stock market performance and influencing Federal Reserve interest rate decisions.

Impact on Economic Growth and Market Performance

Immigration has historically played a crucial role in bolstering the US economy. The influx of immigrants has augmented the labor force, leading to robust economic expansion. However, with the projected decrease in immigration levels, the economy may experience a notable deceleration. Analysts anticipate that this shift could reduce GDP growth from its previous range of 2.5% to 3% to approximately 2% this year and between 1% and 1.5% next year. This downturn could challenge bullish predictions for the stock market, as many equity strategists had expected the economy to maintain a growth rate above 2% in the coming years.

Experts at Morgan Stanley forecast a significant reduction in immigration, estimating that the number of new immigrants will drop from an average of 3 million annually between 2022 and 2024 to just 1 million this year and further down to 500,000 by 2026. This decline is expected to exert downward pressure on economic activity. Many industries heavily reliant on immigrant labor could face substantial labor shortages, potentially disrupting business operations and reducing overall productivity. Consequently, the stock market may not perform as anticipated, given the lower economic growth projections. Investors should reassess their strategies in light of these changing dynamics.

Inflationary Pressures and Monetary Policy Implications

Beyond economic growth, reduced immigration levels could also contribute to persistent inflation. A slower-growing labor force would intensify competition in the job market, compelling employers to offer higher wages to attract and retain talent. This wage pressure could lead to increased prices across various sectors, thereby fueling inflation. Additionally, mass deportations could exacerbate labor shortages in industries where noncitizen immigrants are overrepresented, further driving up wages and inflation.

Nancy Vanden Houten, lead US economist at Oxford Economics, highlighted that while much of the immigration debate centers on recent surges, many noncitizen immigrants have been in the US for over a decade. Industries that rely heavily on these long-term residents could face severe labor shortages if mass deportations occur. Such shortages would likely push wages higher, contributing to inflationary pressures. For policymakers at the Federal Reserve, this scenario presents a complex challenge. While current forecasts suggest only one interest rate cut this year due to immigration curbs, there is a possibility that rising inflation could eventually prompt the Fed to raise rates. Blake Gwinn, head of US rates strategy at RBC Capital Markets, emphasized that immigration policies, rather than tariffs, could be the primary driver for future interest rate hikes.