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

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Bank of America Research economists remain convinced that the Federal Reserve will not cut interest rates in 2025, despite a recent wave of disappointing jobs data fueling market speculation of an imminent policy shift. The reason, according to a new research 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 “markets are conflating recession with stagflation.”

The key distinction comes down to labor supply, not just demand. The research points to a sharp contraction in the foreign-born labor force—down by 802,000 since April—as immigration policy has tightened dramatically. 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. Bank of America estimates that break-even job growth, meaning the rate of hiring needed to keep joblessness steady, will hit just 70,000 per month this year. 

Chair Jerome Powell’s recent comments 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. In July, unemployment inched up to 4.25% from 4.12%, but remains within range-bound levels.

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 markets 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.

By contrast, BofA still sees labor demand holding up, and pointed to average hourly earnings growth of 3.9% year on year in July, and aggregate weekly payrolls increasing by 5.3%.

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

BofA explained how two Trump policies are fueling the brewing mix of stagnant growth and inflation that could be taking America back to the 1970s.

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 Research

Sectors that rely heavily on immigrant labor, like construction, manufacturing, and hospitality, have seen disproportionate 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.

That’s notable because leisure and hospitality was a strong spot in the labor market in 2023-24.

Policy #2: Tariff Escalation

The second pillar of stagflation comes from a new round of import tariffs, particularly on Chinese goods. Since July 4, the overall effective U.S. tariff rate has jumped to about 15%.

Bank of America’s economists warn that tariffs are starting to show up in the inflation data: core goods prices excluding autos rose 0.53% in June, the fastest in 18 months.

Crucially, underlying core PCE inflation remains stuck above 2.5%—well above the Fed’s target. With long-term expectations anchored for now, policymakers are wary of cutting rates before there’s clear evidence that inflation has peaked. Some regional Fed presidents have warned the tariff effect could last deep into 2026.

Risks for the Fed: cutting now could backfire

Markets 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.

The research note concludes that unless the August jobs report brings a sharp rise in unemployment—specifically above 4.4%—or inflation softens unexpectedly, the Fed is likely to hold steady through the end of the year. 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. 

Introducing the 2025 Fortune Global 500, the definitive ranking of the biggest companies in the world. Explore this year’s list.



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Epstein grand jury documents from Florida can be released by DOJ, judge rules

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A federal judge on Friday gave the Justice Department permission to release transcripts of a grand jury investigation into Jeffrey Epstein’s abuse of underage girls in Florida — a case that ultimately ended without any federal charges being filed against the millionaire sex offender.

U.S. District Judge Rodney Smith said a recently passed federal law ordering the release of records related to Epstein overrode the usual rules about grand jury secrecy.

The law signed in November by President Donald Trump compels the Justice Department, FBI and federal prosecutors to release later this month the vast troves of material they have amassed during investigations into Epstein that date back at least two decades.

Friday’s court ruling dealt with the earliest known federal inquiry.

In 2005, police in Palm Beach, Florida, where Epstein had a mansion, began interviewing teenage girls who told of being hired to give the financier sexualized massages. The FBI later joined the investigation.

Federal prosecutors in Florida prepared an indictment in 2007, but Epstein’s lawyers attacked the credibility of his accusers publicly while secretly negotiating a plea bargain that would let him avoid serious jail time.

In 2008, Epstein pleaded guilty to relatively minor state charges of soliciting prostitution from someone under age 18. He served most of his 18-month sentence in a work release program that let him spend his days in his office.

The U.S. attorney in Miami at the time, Alex Acosta, agreed not to prosecute Epstein on federal charges — a decision that outraged Epstein’s accusers. After the Miami Herald reexamined the unusual plea bargain in a series of stories in 2018, public outrage over Epstein’s light sentence led to Acosta’s resignation as Trump’s labor secretary.

A Justice Department report in 2020 found that Acosta exercised “poor judgment” in handling the investigation, but it also said he did not engage in professional misconduct.

A different federal prosecutor, in New York, brought a sex trafficking indictment against Epstein in 2019, mirroring some of the same allegations involving underage girls that had been the subject of the aborted investigation. Epstein killed himself while awaiting trial. His longtime confidant and ex-girlfriend, Ghislaine Maxwell, was then tried on similar charges, convicted and sentenced in 2022 to 20 years in prison.

Transcripts of the grand jury proceedings from the aborted federal case in Florida could shed more light on federal prosecutors’ decision not to go forward with it. Records related to state grand jury proceedings have already been made public.

When the documents will be released is unknown. The Justice Department asked the court to unseal them so they could be released with other records required to be disclosed under the Epstein Files Transparency Act. The Justice Department hasn’t set a timetable for when it plans to start releasing information, but the law set a deadline of Dec. 19.

The law also allows the Justice Department to withhold files that it says could jeopardize an active federal investigation. Files can also be withheld if they’re found to be classified or if they pertain to national defense or foreign policy.

One of the federal prosecutors on the Florida case did not answer a phone call Friday and the other declined to answer questions.

A judge had previously declined to release the grand jury records, citing the usual rules about grand jury secrecy, but Smith said the new federal law allowed public disclosure.

The Justice Department has separate requests pending for the release of grand jury records related to the sex trafficking cases against Epstein and Maxwell in New York. The judges in those matters have said they plan to rule expeditiously.

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Sisak reported from New York.



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Miss Universe co-owner gets bank accounts frozen as part of probe into drugs, fuel and arms trafficking

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Mexico’s anti-money laundering office has frozen the bank accounts of the Mexican co-owner of Miss Universe as part of an investigation into drugs, fuel and arms trafficking, an official said Friday.

The country’s Financial Intelligence Unit, which oversees the fight against money laundering, froze Mexican businessman Raúl Rocha Cantú’s bank accounts in Mexico, a federal official told The Associated Press on condition of anonymity because he was not authorized to comment on the investigation.

The action against Rocha Cantú adds to mounting controversies for the Miss Universe organization. Last week, a court in Thailand issued an arrest warrant for the Thai co-owner of the Miss Universe Organization in connection with a fraud case and this year’s competition — won by Miss Mexico Fatima Bosch — faced allegations of rigging.

The Miss Universe organization did not immediately respond to an email from The Associated Press seeking comment about the allegations against Rocha Cantú.

Mexico’s federal prosecutors said last week that Rocha Cantú has been under investigation since November 2024 for alleged organized crime activity, including drug and arms trafficking, as well as fuel theft. Last month, a federal judge issued 13 arrest warrants for some of those involved in the case, including the Mexican businessman, whose company Legacy Holding Group USA owns 50% of the Miss Universe shares.

The organization’s other 50% belongs to JKN Global Group Public Co. Ltd., a company owned by Jakkaphong “Anne” Jakrajutatip.

A Thai court last week issued an arrest warrant for Jakrajutatip who was released on bail in 2023 on the fraud case. She failed to appear as required in a Bangkok court on Nov. 25. Since she did not notify the court about her absence, she was deemed to be a flight risk, according to a statement from the Bangkok South District Court.

The court rescheduled her hearing for Dec. 26.

Rocha Cantú was also a part owner of the Casino Royale in the northern Mexican city of Monterrey, when it was attacked in 2011 by a group of gunmen who entered it, doused gasoline and set it on fire, killing 52 people.

Baltazar Saucedo Estrada, who was charged with planning the attack, was sentenced in July to 135 years in prison.



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Elon Musk’s X fined $140 million by EU for breaching digital regulations

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European Union regulators on Friday fined X, Elon Musk’s social media platform, 120 million euros ($140 million) for breaches of the bloc’s digital regulations, in a move that risks rekindling tensions with Washington over free speech.

The European Commission issued its decision following an investigation it opened two years ago into X under the 27-nation bloc’s Digital Services Act, also known as the DSA.

It’s the first time that the EU has issued a so-called non-compliance decision since rolling out the DSA. The sweeping rulebook requires platforms to take more responsibility for protecting European users and cleaning up harmful or illegal content and products on their sites, under threat of hefty fines.

The Commission, the bloc’s executive arm, said it was punishing X because of three different breaches of the DSA’s transparency requirements. The decision could rile President Donald Trump, whose administration has lashed out at digital regulations, complained that Brussels was targeting U.S. tech companies and vowed to retaliate.

U.S. Secretary of State Marco Rubio posted on his X account that the Commission’s fine was akin to an attack on the American people. Musk later agreed with Rubio’s sentiment.

“The European Commission’s $140 million fine isn’t just an attack on @X, it’s an attack on all American tech platforms and the American people by foreign governments,” Rubio wrote. “The days of censoring Americans online are over.”

Vice President JD Vance, posting on X ahead of the decision, accused the Commission of seeking to fine X “for not engaging in censorship.”

“The EU should be supporting free speech not attacking American companies over garbage,” he wrote.

Officials denied the rules were intended to muzzle Big Tech companies. The Commission is “not targeting anyone, not targeting any company, not targeting any jurisdictions based on their color or their country of origin,” spokesman Thomas Regnier told a regular briefing in Brussels. “Absolutely not. This is based on a process, democratic process.”

X did not respond immediately to an email request for comment.

EU regulators had already outlined their accusations in mid-2024 when they released preliminary findings of their investigation into X.

Regulators said X’s blue checkmarks broke the rules because on “deceptive design practices” and could expose users to scams and manipulation.

Before Musk acquired X, when it was previously known as Twitter, the checkmarks mirrored verification badges common on social media and were largely reserved for celebrities, politicians and other influential accounts, such as Beyonce, Pope Francis, writer Neil Gaiman and rapper Lil Nas X.

After he bought it in 2022, the site started issuing the badges to anyone who wanted to pay $8 per month.

That means X does not meaningfully verify who’s behind the account, “making it difficult for users to judge the authenticity of accounts and content they engage with,” the Commission said in its announcement.

X also fell short of the transparency requirements for its ad database, regulators said.

Platforms in the EU are required to provide a database of all the digital advertisements they have carried, with details such as who paid for them and the intended audience, to help researches detect scams, fake ads and coordinated influence campaigns. But X’s database, the Commission said, is undermined by design features and access barriers such as “excessive delays in processing.”

Regulators also said X also puts up “unnecessary barriers” for researchers trying to access public data, which stymies research into systemic risks that European users face.

“Deceiving users with blue checkmarks, obscuring information on ads and shutting out researchers have no place online in the EU. The DSA protects users,” Henna Virkkunen, the EU’s executive vice-president for tech sovereignty, security and democracy, said in a prepared statement.

The Commission also wrapped up a separate DSA case Friday involving TikTok’s ad database after the video-sharing platform promised to make changes to ensure full transparency.

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AP Writer Lorne Cook in Brussels contributed to this report.



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