• Markets are already pricing in a 40%-50% chance of recession, according to former Fed Vice Chair Richard Clarida.
  • Economic uncertainty and Fed policy direction in 2025 are driving heightened recession fears.
  • Analysts warn Trump's tariff policies could exacerbate inflation and trigger a downturn.

Growing Recession Risks

Former Federal Reserve Vice Chair Richard Clarida has warned that financial markets are now pricing in a 40%-50% probability of a U.S. recession, reflecting mounting concerns about economic stability. The assessment comes amid escalating trade tensions and uncertainty surrounding Federal Reserve policy in 2025.

"The Fed won't act on predictions this time—they'll need concrete evidence," Clarida said in recent remarks, emphasizing the central bank's cautious stance. The former policymaker, now serving as PIMCO's global economic advisor, noted that President Trump's tariff policies could push year-over-year inflation up by a full percentage point, complicating the Fed's path.

Policy Dilemma

The central bank faces a delicate balancing act between controlling inflation and avoiding an economic contraction. While Clarida described the labor market and broader economy as being in a "good place" as of March 2025, he highlighted tariffs as a persistent threat. "If longer-term inflation expectations rise due to trade policies, the Fed's job becomes much harder," he cautioned.

JPMorgan's Michael Feroli projects a potential two-quarter recession could begin as early as the second half of 2025. Meanwhile, Moody's Analytics chief economist Mark Zandi estimates over a 50% chance of a global recession starting next year, with tariffs acting as the primary catalyst.

Market Implications

Equity markets remain on edge. Analysts suggest the S&P 500 could fall another 10% from recent lows if a downturn materializes, amounting to a 20%-30% decline from its mid-February peak. However, if the economy skirts a recession, stocks may have already bottomed out.

Bank of America's April survey revealed that 80% of fund managers view the trade conflict as the top risk to global growth. Zandi warned that tariff impacts would first hit manufacturing and agriculture before spreading to consumer sectors.

Uncertain Trajectory

At the start of 2024, analysts saw three roughly equally probable outcomes: a soft landing, reaccelerating growth with sticky inflation, or a hard landing. Clarida stressed that much depends on whether the administration can de-escalate trade tensions. "If tariffs ease, we might avoid the worst," he noted—but cautioned that 2025 will prove challenging regardless.