Key takeaways
- J.P. Morgan Research has lowered the probability of a U.S. recession occurring in 2025 to below 50% — down from 60% previously.
- This revised forecast is based on the latest trade policy developments, including the temporary tariff reduction between the U.S. and China.
- The Fed is now expected to start easing only in December, with three sequential cuts thereafter, reaching a policy rate of 3.25 – 3.5% by the second quarter of 2026.
Trade tensions have abated in recent days, with the Trump administration walking back some of its more aggressive tariff policies. This includes the additional 145% levy on Chinese goods, which has now been reduced to 30%. Markets have surged as a result, and U.S. growth forecasts have been revised upward. In light of these developments, is a recession still in the cards?
Why has the probability of a recession fallen so significantly?
“The administration’s recent dialing down of some of the more draconian tariffs placed on China should reduce the risk that the U.S. economy slips into recession this year. We believe recession risks are still elevated but are now below 50%,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
On a static basis, the changes bring the average effective tariff rate from around 24% down to around 14%. “A tariff is a tax, and so relative to prior assumptions this can be seen as a tax cut of almost $300 billion. Most of that prior tax was likely to have been borne by U.S. consumers in the form of higher prices,” Feroli explained. The rollback of this tax will likely provide some relief to consumer spending — enough to tip the second-half outlook from modest contraction toward modest growth.
However, the new tariff rates will still likely boost inflation and hence weigh on real disposable income and real consumer spending. J.P. Morgan Research now expects core personal consumption expenditures (PCE) inflation to hit 3.5% this year — down from 4.0% prior to the truce, but up from 2.2% at the start of the year. In addition, trade policy uncertainty remains a headwind for capital spending.
“Given our new growth outlook, we now see the unemployment rate peaking at around 4.8% by the second quarter of 2026. We still project a modest contraction in employment later this year, as labor demand is projected to slow even more than labor supply,” Feroli added.
“The administration’s recent dialing down of some of the more draconian tariffs placed on China should reduce the risk that the U.S. economy slips into recession this year.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
What is the outlook for interest rates?
Against this more optimistic backdrop, J.P. Morgan Research expects the Fed to hold policy rates steady over the medium term, with the next rate cut likely only taking place in December. This is conditional on current tariff rates remaining in place indefinitely.
“Our updated labor market outlook is less demanding of immediate action to stem employment risks. For the Fed, we are pushing back the timing of the resumption of rate cuts from September to December,” Feroli said. “After December, we see a further three sequential cuts, taking the funds rate target range to 3.25 – 3.5% by the second quarter of 2026.”
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