JPMorgan Hikes Recession Odds As Tariffs Create 'A Dilemma For The Fed'

The probability of a U.S. recession has surged to its highest level in two years as JPMorgan Chase & Co. signals that President Donald Trump's trade policies could deliver a bigger shock to business sentiment, global supply chains and central bank flexibility than previously expected.

In a research note published this week, JPMorgan's chief global economist Bruce Kasman said the bank now places the risk of a U.S. recession at 40%, up from 30%, largely due to the looming rollout of a fresh wave of tariffs.

Tariffs Represent A Triple Threat

"The administration's shift in the application of tariff policy and the potential impact on sentiment have contributed to this increased risk," said Kasman.

According to the expert, the upcoming trade measures would lift the effective U.S. tariff rate to over 10%, slicing 0.5 percentage points off global and U.S. GDP in 2025.

That headline number may appear modest, but the true risk lies beneath: "Our concern… is that three related impulses magnify the size of this drag," he said.

First, Trump's policies risk eroding investor confidence in a business-friendly regulatory environment.

Second, potential restrictions on immigration and cross-border trade could ripple through supply chains. Third, rising inflation expectations might limit the Federal Reserve's ability to counteract the damage through monetary easing.

"Even after accounting for retaliatory actions, this drag is not large enough to threaten an expansion that stands on fundamentally solid ground," Kasman said. But if these three impulses kick in, he added, they could significantly worsen the economic impact.

Sentiment Cracks Are Already Visible

Business and consumer confidence are starting to wane. The University of Michigan's consumer sentiment index dropped to a three-year low in March, while recent Federal Reserve surveys show that capital expenditure intentions among U.S. firms have weakened.

Kasman noted that although sentiment hasn't yet driven a pullback in consumer spending, an inflation-driven erosion of purchasing power could become the tipping point.

"The linkage between consumer confidence and spending has been weak during this expansion… the main near-term risk is the threat of an inflation-driven squeeze," he said.

A US Slowdown Could Hit The World Economy Hard

JPMorgan warned that the global economy is tightly tethered to U.S. momentum. Their research finds that a negative shock to U.S. GDP tends to trigger a 1-to-1 response globally, meaning a U.S.-led downturn could reverberate sharply.

In Europe, the consequences could be especially severe. Kasman said that a global recession, sparked by U.S. policy and sentiment shocks, would likely have a nonlinear impact on the eurozone, dragging down growth across the Economic and Monetary Union through tighter financial conditions.

While JPMorgan's global manufacturing expectations index — a key measure of industrial outlook — has improved recently, the bank attributes that to a front-loaded recovery in global industry that is merely delaying a broader sentiment shock.

What Does This Mean for Fed Policy?

JPMorgan expects the Federal Reserve to cut rates twice in 2025, likely in June and September, in line with the central bank's latest projections.

"The combination of higher inflation and weaker employment growth creates a dilemma for the Fed," said Michael Feroli, chief U.S. economist at the bank.

"We are sticking to our prior forecast for two cuts but can understand why the market looks for more."

The Fed's March projections saw core inflation for 2025 rising to 2.8%, up from 2.5%, and the unemployment rate ticking up to 4.4%, from 4.3%.

JPMorgan slightly trimmed its own 2025 growth estimate to 1.6%, and raised its peak unemployment forecast to 4.4%, a 0.2 percentage point increase from earlier expectations.

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