Bank of America sees stagflation, not recession—and no rate cut this year. It’s because of 2 specific Trump policies

Economy·RecessionBank of America sees stagflation, not recession—and no rate cut this year

The reason, according to a new re note: the U.S. economy is headed toward a battle with stagflation—not recession—and cutting rates could worsen that toxic mix of stagnation and inflation

The BofA team, led by senior U.S. economist Aditya Bhave, cited two major Trump administration policies as the key factors in their call: tough new immigration restrictions and a fresh series of import tariffs

Why it’s not a recession, according to BofA First things first, Bhave’s team turned to the July jobs report that stunned Wall Street with a net downward revision of 258,000 payrolls for May and June

That’s the second largest in modern history outside the initial pandemic shock and the largest ever in a non-recession year, according to Goldman Sachs calculations

But BofA’s strategists argue this doesn’t spell recession

In fact, the crux of their argument, they say, is that “ are conflating recession with stagflation.” The key distinction comes down to labor supply, not just demand

This supply-side squeeze is pushing against weaker labor demand, keeping metrics that should indicate labor slack—such as the unemployment rate and the ratio of job vacancies to unemployed workers—basically flat for the past year

Chair Jerome Powell’s recent s support this interpretation, BofA said

Even if payroll growth slows to zero, the Fed now considers the labor market at “full employment” as long as the unemployment rate doesn’t spike

Other economists disagree with this assessment

A team at UBS said the labor market is showing signs of “stall speed,” with a subdued average workweek of 34.25 hours in July—below 2019 levels and far from the “stretching” that’s typical when labor are tight due to worker shortages

Industry-specific data also show that job losses are not concentrated in sectors with large immigrant workforces, further supporting the view that slack comes from weakened demand, not a supply constraint

The debate over demand versus supply is critical as the answer will determine how the Fed responds to stagflationary signals

Policy #1: Immigration Restrictions Trump’s changes to immigration have quietly but dramatically choked off labor supply

BofA said this is happening earlier than they expected, and they remarked that the collapse in the foreign-born labor force has more than offset gains among native-born workers—even though the latter make up more than three-quarters of the total workforce

Bank of America Re Sectors that rely heavily on immigrant labor, construction, manufacturing, and hospitality, have seen disportionate job losses

Those three accounted for 46,000 of the downward revisions to the May and June data. “Construction payrolls have stalled out this year, manufacturing has declined for three consecutive months and leisure & hospitality added just 9k jobs in total in May and June,” BofA said

Policy #2: Tariff Escalation The second pillar of stagflation comes from a new round of import tariffs, particularly on Chinese goods

With long-term expectations anchored for now, policymakers are wary of cutting rates before there’s evidence that inflation has peaked

Risks for the Fed: cutting now could backfire 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 due to supply, not demand

Cutting rates too soon could undermine the Fed’s credibility if inflation simply accelerates in response, forcing a swift reversal

Any move to cut rates now would require “putting more faith in a forecast of labor market deterioration and transitory tariff effects than in the data in hand,” the strategists write

For this story, Fortune used generative AI to help with an initial draft

An editor verified the accuracy of the information before publishing

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