President Donald Trump‘s immigration policies are getting a lot of attention from both economists and investors. The new restrictions and plans for mass deportations could have a big impact on the U.S. labor market, inflation, and even the Federal Reserve’s decisions on interest rates. While tariffs have been a big focus in financial discussions, analysts say that immigration policy could end up having an even bigger effect on the economy.
How Does Immigration Affect Economic Growth?
Immigration has been a key driver of labor force expansion and overall economic growth. From 2022 to 2024, an average of 3 million people immigrated to the U.S. annually, contributing to a GDP growth rate of 2.5% to 3%, according to Morgan Stanley. However, under Trump's policies, this number is projected to fall to 1 million this year and 500,000 in 2026. As a result, GDP growth could slow to 2% in 2025 and 1% to 1.5% in 2026, potentially undermining bullish stock market expectations, Yahoo Finance reported.
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According to Oxford Economics lead U.S. economist Nancy Vanden Houten, deportations could exacerbate labor shortages, particularly in industries where foreign-born workers make up a significant portion of the workforce. “Employers in these industries could face significant labor shortages in the event of mass deportation, which could put upward pressure on wages and inflation,” Vanden Houten told Yahoo Finance.
How Could This Affect Inflation and the Federal Reserve?
With fewer workers available and wages going up, inflation could stay high. This would force the Federal Reserve to make tough decisions on interest rates. Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, explained that fewer immigrants could lead to more wage-driven inflation, possibly delaying or even reversing the rate cuts the Fed is expected to make.
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“If we start seeing wage pressure coming from the continued declines in immigration, that could actually be more meaningful for the Fed and could be something that I think is [signaling] more risk of a hike later this year than even tariffs,” Gwinn told Yahoo Finance.
Right now, the market is expecting one or two interest rate cuts in 2025, with the first one possibly happening in June, according to the CME FedWatch Tool. But if inflation stays high because of labor shortages, the Fed might have to keep rates where they are or even raise them to cool down the economy.
What Does This Mean for the Market and the Economy?
For investors, the big concern is how Trump's immigration policies will affect the broader economy. If labor shortages push wages up and inflation continues to rise, the Federal Reserve could have trouble lowering interest rates, which could hurt the stock market. On the other hand, some analysts think that stricter immigration rules could actually help American workers by raising wages and reducing competition for jobs.
As Trump's policies continue to take shape, investors will be keeping a close eye on how disruptions in the labor market affect inflation, economic growth, and the Fed's next steps.
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