JPMorgan warns US tariffs could trigger stagflation

JPMorgan has warned that recent U.S. tariff policies could lead to stagflation, a painful mix of slow growth and high inflation.

In a mid-year economic outlook released Wednesday, the bank said there is a 40% chance of a recession in the second half of 2025.

JPMorgan said that the U.S. GDP was projected to rise just 1.3% in 2025, down from a prior 2% projection. The new forecast comes as fears increase that protectionist trade measures, including broad new tariffs announced in April, will raise prices while slowing business activity.

“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, which was last seen during the economic crises of the 1970s, is an unusual and troubling turn of events. It happens when inflation remains elevated even as economic growth slows and unemployment rises in a toxic economic mix that can be hard to address using conventional policy tools.

Trade shock raises concerns over recession

The warning comes as financial markets react to the tariff announcements by the Trump administration, which are intended to protect U.S. industries but could also push up costs for American consumers and businesses.

Markets had already repriced sharply in April when the deal announcement sent U.S. Treasury yields surging. JPMorgan explains that 2-year Treasury yields are up 3.8% while 10-year yields are near 4.3%.

Yet despite the twists and turns, JPMorgan sees some relief coming by year-end, narrowing its target to 3.5% for two-year Treasuries and 4.35% for the 10-year. 

Still, the bank also cautioned that the term premium, or the extra yield investors demand to hold longer-dated bonds, could rise by 40 to 50 basis points amid mounting concerns about U.S. fiscal sustainability and reduced appetite from foreign buyers, the Federal Reserve, and commercial banks.

JPMorgan is more cautious, even though some investors still bet the Federal Reserve will start cutting interest rates later this year. The bank thinks that because of “sticky inflation,” tariffs are a factor in keeping it high; there probably won’t be any cuts from the Fed until December, only a start to a 100-basis-point pace-cutting cycle stretched out until the spring of 2026.

If the economy cools off more than expected, the Fed may have to be more aggressive, but for now, JPMorgan is bracing for a more gradual recalibration.

U.S. dollar falls as global growth picks up

JPMorgan also offered a bearish take on the dollar, arguing that it will suffer as foreign economies perform better than the United States, supported by growth-friendly policies abroad. On the other hand, the U.S. is considered to be heading toward protectionism and possibly isolationist measures, which could weigh on domestic expansion.

The bank says that divergence should put foreign currencies, particularly in emerging markets, on an upward trajectory while reducing foreign demand for U.S. assets like Treasury bonds.

A major worry cited is the sheer magnitude of the U.S. debt market, which could be more difficult to support as key purchasers, including China, Japan, and global banks, began to pull back.

But not all the news is bad. JPMorgan is still bullish on U.S. stocks, arguing that robust consumer spending, strong tech sector earnings, and investor demand could push stocks higher. The bank thinks that barring a big geopolitical letdown or policy disappointment, tech and AI-driven growth will support equity markets.

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