Bank economists warn of risks amid tariff bedlam

The U.S. economy remains on course for a fourth consecutive year of growth, but the specter of recession looms increasingly large amid President Trump’s tariff policies.

That is the updated consensus of the American Bankers Association’s Economic Advisory Committee. The panel, composed of 16 chief economists from some of North America’s largest banks, expects economic growth of 2.1% for both 2025 and 2026. However, President Trump’s spate of new tariffs and threats of more to come pose downside risk to consumer spending and companies’ capital expenditures.

The committee sees recession risks at 30% both in 2025 and 2026, but it warned that could rise depending on the path of federal policy.

The forecast for growth “is based on the expectation that new tariffs won’t stay in place for all of 2025,” Luke Tilley, committee chair and chief economist at the $212 billion-asset M&T Bank‘s Wilmington Trust in Buffalo, New York, told reporters Friday. “The longer the tariffs stay on, the more the risk of recession grows.”

The Trump administration has already increased tariffs on China by an additional 10%. Earlier this month, the president imposed a 25% tariff on imports from Mexico and Canada, although he decided this week to delay some of those duties until April amid market worries they could reignite inflation. Trump also threatened “reciprocal” tariffs on several other countries next month.

Stock markets floundered this week amid the policy confusion and resulting uncertainty. “The net effect is unclear,” said Julien Lafargue, chief market strategist at Barclays Private Bank.

The Atlanta Federal Reserve Bank of Atlanta estimated this week that first-quarter gross domestic product will decline by 2.4%. GDP has expanded every quarter since the second quarter of 2022. It increased at an annual rate of 2.3% in the fourth quarter of 2024, according to the U.S. Bureau of Economic Analysis.

As recently as Feb. 19, the Atlanta Fed was predicting growth of 2.3% for the current quarter.

Tilley said “the policy environment is changing so much” that the ABA panel did not have a high degree of confidence in its outlook. “Trying to figure out which direction it will go is a challenging exercise,” he said.

The potential that prolonged tariffs — and retaliatory tariffs by other countries — will spark a trade war raises concern that higher prices could get passed along to consumers, Tilley said. This could slow spending and curb economic momentum. Historically, he added, tariffs have had an “inflationary impact.”

In the meantime, the “sheer level of uncertainty” could lead businesses to pause on investments, Tilley said. “The uncertainty itself has a downward impact on growth.”

The dubious outlook also leaves the direction of interest rates on shaky ground.

The Federal Reserve lowered rates three times in the second half of 2024 after drawing down inflation from this century’s peak of 9.1% in 2022. However, the annual pace of inflation ticked up to 3% in January from 2.9% at the end of 2024. That kept the consumer price reading well above the Fed’s 2% target. The unknowns surrounding tariffs may lead the Fed to hold off on additional cuts.

“Eyes remain on tariffs, inflation and interest rates,” Raymond James Chief Investment Officer Larry Adam said. The “primary driver of interest rates remains inflation and how the Federal Reserve is likely to react to inflationary moves.” Recent commentary from Fed policymakers suggests their “interest rate target will hold steady until inflation clearly improves.”

The effective federal funds rate currently sits at 4.65%. The ABA’s committee of economists anticipates two 25-basis-point cuts in both 2025 and 2026. These expectations, however, are based on an assumption that inflation will be moderate.

Meanwhile, the job market proved strong through February, though it slowed modestly and could further decelerate this month as Trump’s administration pursues workforce reductions across the federal government.

The Labor Department said Friday that U.S. employers added 151,000 jobs in February, and the unemployment rate ticked up to 4.1% from 4.0% the prior month. The pace of job gains slowed from a prior 12-month average of 168,000. The jobless rate has hovered in a narrow range of 4.0% to 4.2% since May 2024. “Job growth has remained solid in recent months, but risks to the employment outlook are to the downside,” Tilley said.

Pentagon Federal Credit Union CEO James Schenck told American Banker that, based on conversations with business leaders across his organization’s Washington, D.C.-area footprint, companies expect to continue hiring this year. Those firms include the $31 billion-asset PenFed in McLean, Virginia, he said. Schenck expects private employers will recruit laid-off federal workers in the capital region and nationally.

“I see it as a period of transition,” Schenck said. “I think the private sector is strong enough to absorb the public-sector losses at this time.”

However, Schenck also cautioned “there is a lot of uncertainty right now.” Even in periods of relative stability, he said, projections about the job market and the economy are hardly decisive. “The best economists are historians.”