JPMorgan sees tariff-induced US 'stagflationary' slowdown in 2025

By Davide Barbuscia

NEW YORK (Reuters) -U.S. trade policies will likely slow down global economic growth and rekindle inflation in the United States, where there is a 40% probability of a recession in the second half of this year, JPMorgan analysts said on Wednesday.

U.S. economic growth is expected at 1.3% this year, down from a 2% forecast at the beginning of 2025, with higher U.S. tariffs seen as adding negative shocks to the economy, the bank said in a mi-year outlook research note.

"The stagflationary impulse from higher tariffs has been the impetus for our lowered GDP growth outlook for this year," it said. "We still view recession risks as elevated."

Stagflation is a worrying mix of sluggish growth and relentless inflation that haunted the U.S. in the 1970s.

The U.S. bank has a bearish outlook on the U.S. dollar due to slower U.S. growth when compared to growth-supportive policies outside of the United States that will bolster other currencies, including in emerging markets.

It expects the share of demand for U.S. Treasuries from foreign investors, the Federal Reserve, and commercial banks, to decline given the growing size of the U.S. debt market.

The compensation required by investors for the risk of holding U.S. Treasuries, known as term premium, could increase by 40-50 basis points over time, it said, though it does not expect sharp increases in Treasury yields such as the ones seen in the first half of this year.

In April, Treasury yields spiked amid broader market volatility caused by U.S. President Donald Trump's announcement of sweeping tariffs. JPMorgan expects U.S. Treasury two-year yields will end the year at 3.5% and benchmark 10-year yields at 4.35%. They stood at 3.8% and 4.3%, respectively, on Wednesday.

Due to sticky inflation caused by tariffs and a resilient economy, the bank expects the Fed will cut interest rates by 100 basis points between December and spring 2026, later than the consensus among rates futures traders, who were betting on two 25-basis point rate cuts this year as of Wednesday. A recession or a sharper economic slowdown than anticipated, would trigger a more aggressive cutting cycle, the JPMorgan analysts said.

Still, the bank remained bullish on U.S stocks, given continued consumer and economic resilience despite policy uncertainty.

"Absent major policy and/or geopolitical surprises ... we believe the path of least resistance to new highs will be supported by Tech/AI-led strong fundamentals, a steady bid from systematic strategies, and flows from active investors on dips," it said.

(Reporting by Davide Barbuscia, Editing by Nick Zieminski)