The U.S. economy is projected to experience slower growth and renewed inflationary pressures in 2025 due to the country’s trade policies, according to a recent analysis by JPMorgan. Analysts from the financial institution indicated that there is a 40% chance of a recession occurring in the second half of the year. The U.S. Gross Domestic Product (GDP) growth estimate has been adjusted downward to 1.3% for the year, a decline from the previous forecast of 2% at the year’s start. This revision is attributed to the adverse impact of higher tariffs on the economy, which are expected to deliver negative shocks.
JPMorgan highlighted that the “stagflationary impulse” from these tariffs has been a significant factor in their reduced GDP outlook. Stagflation, a term used to describe the troubling combination of stagnant economic growth and persistent inflation, was a significant concern for the U.S. in the 1970s and appears to be resurfacing. The bank’s outlook on the U.S. dollar is bearish, as slower domestic growth contrasts with more supportive policies in other countries, potentially strengthening foreign currencies, particularly in emerging markets.
The demand for U.S. Treasuries by foreign investors, the Federal Reserve, and commercial banks is expected to decrease as the U.S. debt market expands. Investors may require higher compensation for the risk associated with holding U.S. Treasuries, which could increase the term premium by 40-50 basis points over time. Despite this, the bank does not anticipate a repeat of the sharp increases in Treasury yields seen earlier in the year.
In April, Treasury yields surged due to market volatility following President Donald Trump’s announcement of extensive tariffs. JPMorgan predicts that U.S. Treasury two-year yields will settle at 3.5%, while the benchmark 10-year yields are expected to reach 4.35% by year-end.
With inflation remaining stubbornly high due to tariffs and a robust economy, the Federal Reserve is anticipated to cut interest rates by 100 basis points between December and the spring of 2026. This adjustment is expected to occur later than the current consensus among rates futures traders, who are betting on two 25-basis point rate cuts this year. Should the economy face a recession or a more severe slowdown than projected, JPMorgan analysts foresee a more aggressive rate-cutting cycle.
Despite the economic uncertainties and policy volatility, the bank maintains an optimistic outlook on U.S. stocks. The resilience of consumers and the economy, coupled with strong fundamentals in the technology and artificial intelligence sectors, are seen as supportive of the stock market. Barring any major policy or geopolitical surprises, the path to new highs could be driven by these sectors, alongside consistent investment from systematic strategies and active investors seeking opportunities during market dips.
