What is the probability of a recession? 

In light of heightened trade policy uncertainty, J.P. Morgan Research has raised the probability of a global recession taking hold in 2025 to 40% — up from 30% at the start of the year. 

“We now see a materially higher risk of a global recession. The administration’s shift in the application of tariff policy and the potential impact on sentiment have contributed to this increased risk,” said Bruce Kasman, chief global economist at J.P. Morgan.

A new slate of tariffs is set to be announced in early April, which will likely move the effective U.S. tariff rate above 10% and result in a 0.5 percentage point drag on 2025 U.S. and global GDP. “Even after accounting for retaliatory actions, this drag is not large enough to threaten an expansion that stands on fundamentally solid ground. Our concern, however, is that three related impulses magnify the size of this drag,” Kasman observed.

Firstly, the new set of tariffs could undermine the view that the Trump administration will maintain a business-supportive policy stance, creating a large shock to business sentiment. Key sectors of the North American economy could also be disrupted as the administration moves to restrict trade and immigration. Finally, there could be less room for pre-emptive Fed policy to cushion these magnifying effects if near-term inflation expectations move higher.

J.P. Morgan’s global manufacturing expectations index (MEI) fell sharply during the 2018–2019 trade war but has, somewhat counterintuitively, moved higher in recent months. “We attribute this lift to the front-loaded pickup in global industry that is offsetting a potential drag from rising trade war concern. Although this will likely prove transitory, it may be serving to delay a brewing sentiment shock,” Kasman said. On the other hand, the Fed’s recent regional surveys showed a stepdown in U.S. capex spending intentions, indicating that business sentiment has taken a hit.

In addition, consumer confidence is souring in the U.S., slumping to a three-year low in March, according to a recent survey by the University of Michigan. “The linkage between consumer confidence and spending has been weak during this expansion and we would not expect a sentiment-driven pullback in spending, absent a compression in real income. Here, the main near-term risk is the threat of an inflation-driven squeeze on purchasing power,” Kasman noted.

A slowdown in U.S. growth could in turn spill over to the rest of the world. Analysis by J.P. Morgan Research indicates that the typical beta of a U.S. GDP shock to the world is around 1-for-1. “A U.S.-led recession would likely have a nonlinear impact working through financial conditions that would weigh heavily on Economic and Monetary Union (EMU) growth. While this outturn would likely unwind U.S. outperformance, a global recession would be no reason to view the resulting growth rotation positively,” Kasman added. 

What is the outlook for interest rates? 

Against this rapidly evolving economic backdrop, J.P. Morgan Research expects two more rate cuts this year — in line with the Fed’s own forecasts. “We continue to see cuts in June and September, with the risk of more cuts but starting later,” said Michael Feroli, chief U.S. economist at J.P. Morgan.

That said, the cutting cycle will largely be shaped by policy developments. Trade policy uncertainty could weigh on activity growth, while the tariffs that have already come into force — including those on steel and aluminum — could stoke headline inflation, resulting in a corresponding drag on consumer purchasing power. On top of that, retaliatory measures by foreign trading partners could impact gross export growth. As a result, J.P. Morgan Research has lowered its estimate of 2025 real GDP growth by 0.3 percentage points to 1.6%, and now expects the unemployment rate to peak at 4.4% — 0.2 percentage points higher than its previous forecast.

In the same vein, the Fed revised its economic projections for the year during its recent March meeting, indicating that this is largely due to trade policy. The Fed’s real GDP growth forecast for 2025 now stands at 1.7% (down from 2.1%), while core PCE was revised up from 2.5% to 2.8%. Unemployment was revised up a tenth to 4.4%.

“The combination of higher inflation and weaker employment growth creates a dilemma for the Fed. We are sticking to our prior forecast for two cuts but can understand why the market looks for more,” Feroli said.

All in all, the Fed looks likely to maintain an asymmetric reaction function — resistant to hike in the face of upside surprises to growth and inflation, while prepared to ease quickly in the face of realized labor market weakness. “This suggests that the distribution of policy outcomes this year is concentrated in two buckets. On a continued expansion and elevated inflation path consistent with the J.P. Morgan baseline and the Fed’s Summary of Economic Projections, the FOMC is unlikely to move much this year,” Kasman added. “At the same time, a clear break in the U.S. labor market should deliver substantial easing of 150 basis points or more, even if inflation remains elevated.”