- President Donald Trump's tariffs may be in a legal battle for survival, but his immigration policy is running at full speed - and it could be key to opening the door for a larger rate cut by the Federal Reserve.
Morgan Stanley analysts noted in a recent memo that "Trade policy may be uncertain, but immigration policy is not," emphasizing that data up to April indicates a sharper slowdown in immigration in 2025 than previously expected.
Analysts have cut their immigration forecasts to 800,000 this year and 500,000 next year, citing the latest data. A halt in the flow of immigration is likely to reduce population and workforce growth, keeping the labor market tight even as employment growth slows.
Morgan Stanley's updated immigration index indicates that population growth will slow to 0.4% in 2025 and 0.3% in 2026, with workforce growth expected to slow to 0.7% this year and 0.5% next year.
Analysts said: "A decline in immigration means the labor market will remain tight even with a slowdown in employment growth. The Fed may not interpret the slow growth in employment as a sign of weakness."
But the background of a slowing workforce is important for the Fed. With potential growth falling to 2.0% and the possibility of it dropping to 1.5% next year, Morgan Stanley believes that the neutral rate - which neither stimulates nor restrains growth - may decline, "meaning that the Fed will cut more once it starts cutting."
Morgan Stanley analysts point out that a lower potential growth rate translates to a lower neutral interest rate, expecting the policy rate to reach a low of 2.50-2.75% in the easing cycle in 2026.