The economy could suffer a brutal winter as President Donald Trump’s tariffs and immigration crackdown keep the U.S. teetering on the edge of recession.
While tax cuts and government spending on defense should help growth, that won’t come until next year. For now, the base case is that the economy avoids a recession, “but not by much,” Zandi said.
“The economy will be most vulnerable to recession toward the end of this year and early next year,” he added. “That is when the inflation fallout of the higher tariffs and restrictive immigration policy will peak, weighing heavily on real household incomes and thus consumer spending.”
According to Zandi, the benchmark rate will eventually settle at an estimated equilibrium level of 3% by late 2026, down from 4.25%-4.50%.
Despite the Fed’s inflation concerns, policymakers should ease as they perceive the effects of tariffs on prices as being only temporary instead of being persistent. Meanwhile, a greater risk is lurking in the jobs data.
“The weakening economy, particularly the job market, will motivate the Fed to cut rates sooner rather than later,” Zandi said, adding that pressure from Trump to cut will also be hard to ignore. “Job growth has already come to a near standstill, as businesses have curtailed their hiring. The big downward revisions to previous months’ job gains also suggest the economy is at an inflection point, and job losses in the coming months are increasingly likely.”
With the economy facing many threats, it wouldn’t take much to push it into recession, he warned, singling out a selloff in the Treasury bond market that would send long-term yields soaring.
That’s because the U.S. is already mired in massive budget deficits, which are also being increasingly driven by interest payments on the rapidly mounting debt. And the recently passed tax-and-spending package is expected to add trillions to the deficit.
“There are many potential catalysts for a bond market selloff,” Zandi said. “Given recent events, Trump’s appointment of a new Federal Reserve chair by May is a good candidate. The Fed’s independence is in question, and nothing is more likely to spook bond investors than if the Fed is captured and keeps short-term rates too low for too long, fomenting higher inflation.”
