Donald Trump began suggesting tariffs on Canada, Mexico, and China shortly after the November election. However, the Trump administration surprised economists and industry analysts when it unveiled blanket 10% tariffs on virtually every U.S. trading partner that went into effect on April 5th.
Though some nations are only subject to the 10% flat rate, others —such as many of the top Southeast Asian manufacturers—have been levied tariffs up to 49%.
Though Trump has publicly declared that these tariffs are fair and will reverse the U.S. trade deficit, most prominent market players predict significant economic repercussions from this trade strategy.
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JP Morgan, Goldman Sachs, S&P Global, and other major brokerages have increased the probability of a U.S. economic recession this year in light of pending trade wars. Top executives predict an economic slowdown with growing certainty, but there may be other changes in the financial landscape.
The Federal Reserve has taken a ‘wait and see’ approach to interest rates as the Trump administration rolls out new policies. Many now expect the central bank to make definitive updates based on how the economy reacts to Trump tariffs.
The Trump administration’s newly unveiled reciprocal tariffs could trigger another economic recession, but the Fed’s interest rate policy may adjust accordingly.
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JP Morgan, Goldman Sachs, and S&P Global now predict a U.S. recession in 2025
The threat of a U.S. recession has been looming since inflation rates began skyrocketing in 2022 as the economy adjusted to post-COVID changes. Fed chair Jerome Powell led the country through a notoriously difficult economic soft-landing by taming inflation and avoiding an economic recession.
However, major banks and brokerages are now adjusting their economic forecasts, as Trump’s newly announced tariffs are expected to send the U.S. economy into a tailspin. The global stock market has lost over $10 trillion in the past week from a freefall directly caused by the new U.S. trade policies.
In a letter to shareholders, JP Morgan CEO Jamie Dimon wrote, “The economy is facing considerable turbulence (including geopolitics), and we are likely to see inflationary outcomes. Whether or not the menu of tariffs causes a recession remains in question, but it will slow down growth.”
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JP Morgan analysts recently revised the firm’s economic outlook to increase the likelihood of a recession this year from 40% to 60% due to Trump’s new tariffs and monetary policies. This is a surprisingly bold prediction, as banks typically avoid rattling markets without cause.
Goldman Sachs initially updated its economic forecast early last week to factor in a 35% chance of a recession. Now, the heavy-hitting investment bank has upped the likelihood of a recession to 45%, indicating that big banks are bracing for the economic impact of a trade war.
The Federal Reserve is likely to update its interest rate strategy in light of tariffs
The anticipated impact of reciprocal tariffs the Trump administration enacted last week has economists and market analysts predicting weaker economic growth will prompt the Fed to cut interest rates again.
Related: Trump tariff showdown could have huge impact on housing market
Economists at JP Morgan expect increased interest rate cuts to absorb most of the initial market shocks from tariffs.
Goldman Sachs analysts now anticipate three interest rate cuts from the Fed this year instead of the two that were expected before the announcement of Trump’s reciprocal tariffs.
Both Nomura and RBC have updated their interest rate predictions after previously expecting zero cuts this year, per Reuters. Nomura now expects the Fed to cut rates once, while RBC expects three cuts.
While markets may begin to price in lower interest rates, the general uncertainty could have lasting economic impacts.
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