AP Photo/Manuel Balce Ceneta
Donald Trump's vow to initiate the country's biggest deportation campaign is a massive stagflationary hazard, risking an economic downturn amid even tighter monetary policy, one think-tank economist said.
Still, it's a proposal the Republican candidate would have the legal backing to pursue, Peterson Institute president Adam Posen said.
If committed, Trump would have to remove over 1.2 million immigrants to break through the previous deportation record. At the same time, he's also pledged to deport all undocumented workers from the US, which total 7.5 million people, Posen said.
In effect, that's a major depletion of labor supply, he noted, which would increase the price firms need to pay for to attract workers. While that would hike costs for consumers down the line, shrunken labor typically means slower economic growth.
"Leaving aside the human issues, the implementation issues, what this would mean for the economy is a manufacturing-centered recession," he told Bloomberg TV on Wednesday. "And inflation would go up so it would actually be stagflation, but the inflationary effects would then be outweighed by the recession."
In past months, a handful of institutions have pointed out surging immigration as a net-positive for the economy, with foreign-born workers taking on cheap labor and pushing up US output.
To Posen, the immigration-inflation risk is made worse when combined with Trump's trade proposals, as the former president has touted higher tariffs across the board.
Given that taxing US imports will typically reduce the inflow of products entering the country, the reduced supply means higher prices on both domestic and foreign products, experts have warned.
If Trump follows up on his word, markets should expect the Federal Reserve to aggressively hike interest rates, as few other solutions exist in a stagflationary scenario. In Posen's view, policy will rise well over 100 basis points through the second half of 2025.
To be sure, a continued Biden presidency comes with its own inflation risks, he said, though they won't reach the extremes expected of a Trump administration.
The current president has also leaned into protectionism, recently amplifying trade tariffs on certain Chinese products. Similarly, Biden has modestly boosted restrictions on immigration. Under him, the Fed will likely have to raise rates once or twice.
That's also as both candidates are facing more broader inflationary factors in the near-term future, Posen noted.
For instance, federal spending is presumed to go up whoever wins the office, while the Fed's current interest rates have not been tight enough to put the brakes on inflation, he said.
