The U.S. economy faces a potential stagflationary slowdown this year according to JPMorgan analysts because tariffs will reduce growth while causing inflation to rise.
The bank reduced its U.S. GDP growth forecast to 1.3% for 2025 from its previous 2% prediction because higher import duties created negative economic effects. The bank predicts a 40% chance of recession during the second half of the year.
The bank attributes its reduced GDP growth forecast to stagflationary effects caused by higher tariffs according to its mid-year note. The dollar will experience weakness because of slow growth while foreign central banks implement growth-friendly policies that boost other currencies according to JPMorgan.
The market expansion will lead to reduced U.S. Treasury demand which should increase term premiums by 40-50 basis points throughout time. The bank does not predict a significant yield increase similar to what occurred during the previous year.
The bank predicts two-year Treasury yields will reach 3.5% and 10-year yields will reach 4.35% by the end of the year. The Fed will need to delay rate cuts until late 2025 or early 2026 because inflation remains stubborn while the current outlook predicts 100 basis points of easing. A more severe economic decline would force the Fed to take stronger monetary policy measures.
JPMorgan maintains a positive outlook on U.S. equities because of the economy’s strength and consumer market demand despite existing policy challenges.
