Is the US heading towards a Trump-tariff recession? JPMorgan says yes

In a striking break from the cautious optimism still held by many on Wall Street, JPMorgan Chase & Co. has issued the first definitive recession forecast tied directly to President Donald Trump‘s latest round of tariffs. The investment banking giant, led by its chief U.S. economist Michael Feroli, is predicting a two-quarter economic contraction beginning in the second half of 2025—marking the first explicit recession call from a major Wall Street institution in the wake of the Trump administration’s sweeping trade policy changes.

Feroli’s analysis, published late Friday, suggests the U.S. economy will contract by 1% in the third quarter and by another 0.5% in the fourth quarter. This downturn, driven by the cumulative weight of broad-based 10% tariffs and retaliatory trade actions by global partners, is forecast to drag full-year 2025 GDP growth to negative 0.3%. This stark revision from earlier growth expectations of 1.3% not only shifts the economic narrative but also intensifies pressure on the Federal Reserve to respond—though the path ahead remains uncertain.

How do Trump’s tariffs impact inflation and growth in the current economic cycle?

JPMorgan’s outlook presents a grim picture of a stagflationary environment where inflation rises even as growth stagnates. The firm’s base case sees the core Personal Consumption Expenditures (PCE) index—widely tracked as the Federal Reserve’s preferred inflation gauge—ending 2025 at 4.4%. That projection marks a sharp increase from the February reading of 2.8%, reflecting the anticipated impact of import price spikes and disrupted supply chains.

According to Feroli, the inflationary pressure resulting from the Trump tariffs could end up being even more painful than the post-pandemic inflation surge. In contrast to the prior episode, when nominal income growth was accelerating, the current environment is characterised by softening wage expansion and growing economic uncertainty. In such a climate, he argued, households may become more reluctant to draw from their savings to maintain consumption—leading to deeper demand-side weakness.

Adding to the macroeconomic strain, China has already announced a 34% retaliatory tariff on U.S. goods, while other trading partners are reportedly considering similar responses. The tit-for-tat tariff escalation has reignited fears of a global trade war, undermining both business investment and consumer confidence in the world’s largest economy.

What does JPMorgan expect from the Fed amid recession and stagflation risks?

Despite the bleak near-term outlook, Feroli believes the Federal Reserve will eventually respond to economic weakness with a series of rate cuts beginning in June. His base case assumes a 25-basis-point reduction at each meeting through January 2026, which would bring the Fed’s benchmark interest rate down to approximately 3% from the current 4.25%–4.5% range.

Still, Feroli cautioned that there is a “risk” the central bank might delay its response if policymakers lack confidence that the slowdown is persistent enough to warrant immediate action. Fed Chair Jerome Powell reiterated a cautious stance in his most recent remarks, suggesting that officials remain focused on balancing inflation control with job market stability.

That balance, however, is becoming harder to strike. JPMorgan’s model projects the U.S. unemployment rate will climb to 5.3% by late 2025, up from 4.2% in March, according to the latest Bureau of Labor Statistics data. This anticipated labour market deterioration, combined with weakening wage growth, may ultimately nudge the Fed toward more aggressive easing.

How did markets react to JPMorgan’s recession call and tariff-driven risks?

The forecast landed amid one of the worst weeks for U.S. equity markets since the height of the COVID-19 pandemic. Over the past week, investors saw roughly $5.4 trillion wiped off the value of publicly listed companies. The Dow Jones Industrial Average shed nearly 3,300 points, or close to 8%, falling into correction territory. The S&P 500 dropped approximately 9%, while the tech-heavy Nasdaq Composite plunged by 10%, officially entering a bear market as it declined more than 20% from recent highs.

This market rout is being widely attributed to investor concerns over the long-term economic implications of Trump’s tariff policies, which have cast uncertainty over corporate earnings, supply chains, and consumer demand. The across-the-board nature of the tariffs—and their potential to disrupt trade flows not only with China but also with Europe, Mexico, and Canada—has led many economists to revisit their baseline assumptions.

What historical context explains the current tariff-induced downturn?

Trade policy as a driver of recession is not without precedent. The Smoot-Hawley Tariff Act of 1930, for instance, is often cited as a key factor that deepened and prolonged the Great Depression. More recently, during Trump’s first term, escalating tariffs on Chinese goods between 2018 and 2019 led to significant market volatility and uncertainty for manufacturers, farmers, and tech companies reliant on global supply chains.

Though the 2018–2019 tariff war did not cause an outright recession, it contributed to a marked slowdown in industrial production and business investment, which only recovered after the U.S. and China reached a partial “phase one” trade agreement in early 2020. With the latest round of tariffs now broader and more severe, JPMorgan’s forecast underscores the heightened risk that trade restrictions—especially when deployed in an already fragile global economic environment—can become a direct cause of recession.

How are other institutions reacting to the tariff-driven economic risks?

JPMorgan may be the first major Wall Street firm to formally declare a recession outlook, but it’s not alone in recalibrating expectations. Barclays has revised its 2025 GDP forecast into negative territory. Citi now sees growth slowing to just 0.1%, while UBS has downgraded its projection to 0.4%. While each institution employs different models and assumptions, the underlying concern remains the same: tariff-induced inflation could choke demand, strain household budgets, and erode business margins.

Even without a full-blown recession, many economists now see stagflation—a toxic mix of stagnant growth and high inflation—as the most likely macroeconomic outcome. For central bankers, this raises the risk of a policy trap, where rate hikes would worsen unemployment while rate cuts could fuel further price increases. JPMorgan’s Feroli suggested that in such a scenario, the Fed would ultimately prioritise the labour market, especially if wage growth subsides, thereby reducing the threat of a wage-price spiral.

What’s next for the US economy amid rising stagflation fears?

As economic data unfolds over the coming months, markets will watch closely for confirmation of JPMorgan’s forecast. Key indicators such as consumer spending, job growth, business investment, and inflation readings will shape expectations around both recession timing and Federal Reserve policy responses. In the meantime, corporate America is bracing for an environment where cost pressures rise, consumer sentiment weakens, and access to credit could become increasingly constrained.

The next phase of the economic story will also depend heavily on geopolitical developments, particularly trade negotiations and potential retaliatory measures by global partners. If the current tariff escalation turns into a broader trade war, the damage to global supply chains and capital flows could be deeper and more prolonged than currently anticipated.

JPMorgan’s bold projection represents a significant inflection point in how Wall Street views the intersection of politics and economics. It reinforces the risks that protectionist trade policy poses to economic stability and places renewed focus on the Federal Reserve’s ability to navigate an increasingly complex macroeconomic environment. With volatility surging, recession fears mounting, and inflation pressures refusing to abate, the next few quarters could define the trajectory of the U.S. economy well into 2026.