JPMorgan predicts US economic contraction due to tariffs

Investing.com -- On Friday, JPMorgan Chase (NYSE:JPM) Bank's Chief U.S. Economist, Michael Feroli, revised the bank's economic outlook sharply downwards in light of recent tariff announcements by the Trump administration. The bank now expects the U.S. real GDP to contract, forecasting a full-year growth rate of -0.3%, a significant drop from the previously projected 1.3%. This anticipated downturn is expected to increase the unemployment rate to 5.3%.

In addition to the GDP contraction, JPMorgan has adjusted its core PCE inflation forecast upward by 1.4 percentage points to 4.4%. Despite this inflation increase, the bank still anticipates the Federal Reserve to initiate an easing policy starting in June.

JPMorgan expects the Fed to cut rates at every meeting through January, bringing the top of the federal funds rate target range down to 3.0%. The bank notes a risk of delayed easing rather than an earlier start.

The bank's analysis suggests that the most direct impact of the tariffs will be felt through higher inflation, which will lead to lower real income and consumer spending. This effect may be more pronounced than during the post-pandemic inflation spike, as nominal income growth has been moderating.

The bank also anticipates that consumers may be hesitant to reduce their savings to support spending growth, especially in a climate of increased uncertainty.

Feroli also expressed greater confidence that retaliatory tariffs, particularly from China, will negatively impact U.S. gross exports.

The weakest economic performance is expected to be concentrated in the middle of the year, with contractions predicted for both the third and fourth quarters. This outlook is partly based on the reversal of first-quarter dynamics involving imports and inventories.

Feroli believes that this stagflationary scenario will pose a significant challenge to Federal Reserve policymakers. He suggests that the labor market's weakness will ultimately be more influential, especially if it leads to subdued wage growth, which could give the Fed more confidence to focus on growth risks without fearing a wage-price spiral.