JP Morgan economists caution that the sweeping U.S. tax and spending package recently passed by the House, while providing a near-term boost to economic activity, is poised to exacerbate the federal deficit and complicate efforts to rein in mounting debt. In a detailed analysis shared with institutional clients, the bank’s research teams outline a mixed picture: an offset to recent growth headwinds, but at the cost of materially higher fiscal imbalances.
A Cushion Against Slowing Growth
According to JP Morgan’s top macroeconomic strategists, the new legislation—which extends and expands many provisions of the 2017 Tax Cuts and Jobs Act, raises child tax credits, and introduces targeted business tax relief—will inject roughly $400 billion in additional stimulus into the economy over the next year alone. This surge of liquidity, they argue, could counterbalance roughly two-thirds of the drag imposed by tariffs and supply-chain disruptions that, cumulatively, JP Morgan estimates have shaved about 1 percent off domestic GDP growth year-to-date. By extending tax relief through 2026 and offering retroactive provisions that accelerate refunds, the bill is expected to boost consumer spending and corporate investment in the near term.
“We see headline GDP growth lifting by as much as 0.5 to 0.7 percentage points in the upcoming quarters,” notes Nora Szentivanyi, a senior global economist at JP Morgan. “The timing of retroactive refunds—particularly concentrated in early 2026—should give a welcome jolt to consumption ahead of the mid-term elections.”
Yet the bank’s budget analysts warn that, despite the bill’s stimulative kick, there are scant credible offsets to its cost. JP Morgan projects the reconciliation measure will add between $3.3 trillion and $3.8 trillion to federal borrowing over the next decade. As a result, the deficit is set to climb from around 6.4 percent of GDP in fiscal 2024 to as much as 7 percent over the medium term, lifting the public debt share from just under 100 percent of GDP to nearly 105 percent by 2030.
“These figures assume baseline economic growth and existing spending trajectories,” explains Michael Feroli, the bank’s chief U.S. economist. “Absent significant spending restraint or new revenue measures, debt dynamics will become more challenging, potentially weighing on the government’s ability to respond to future shocks.”
Interest Rates and Inflation Pressures
Higher deficits, JP Morgan cautions, may also constrain the Federal Reserve’s policy toolkit. With fiscal demand surging and supply-side frictions persisting, the bank sees a heightened risk of a “stagflationary” environment—where subpar growth coincides with sustained inflationary pressures. In a recent note, JP Morgan analysts raised the probability of inflation remaining stubbornly above the Fed’s 2 percent target over the next two years, driven in part by large fiscal deficits and geopolitical uncertainties.
“In our baseline, headline CPI drifts back toward 3 percent by late 2025, with core measures sticky around 3 to 3.5 percent,” JP Morgan forecasts. “Real wage gains will be muted, and corporate pricing power remains intact amid constrained supply chains.”
This outlook underpins the bank’s recommendation that the Fed maintain a cautious stance on rate cuts. Although markets have priced in several quarter-point rate reductions by mid-2026, JP Morgan expects only one or two cuts, contingent on clear evidence of disinflation.
The specter of ballooning deficits has already cropped up in bond markets. In May, one of the major credit rating agencies downgraded the United States’ sovereign rating, citing insufficient fiscal reforms. JP Morgan’s credit analysts view this downgrade as a “lagging indicator” of deeper structural challenges. Higher borrowing needs could push Treasury yields higher over the long haul, with JP Morgan projecting the 10-year yield to edge toward 4 percent by year-end, up from roughly 3.7 percent at present.
Equity markets have thus far remained buoyant, driven by strong profit margins and liquidity. Yet JP Morgan warns of growing “complacency” among investors, as the coupling of fiscal expansion and elevated valuations may elevate downside risks. The bank’s portfolio strategists are advising clients to trim duration exposure and selectively rotate toward value-oriented sectors that historically outperform in rising-rate environments.
Global Spillovers
Beyond U.S. borders, JP Morgan’s international research teams highlight potential spillovers. A stronger fiscal impulse in the world’s largest economy could bolster global demand, lifting export-dependent nations. However, if higher U.S. yields lead to persistent dollar strength, emerging markets could face tighter financing conditions and currency pressures. JP Morgan’s emerging-markets team advises benchmark underweights in local-currency government debt in nations with large external financing needs.
While the new tax and spending package promises a short-term fillip for the U.S. economy, JP Morgan’s comprehensive assessment paints a cautionary tale for policymakers and investors alike. The bank underscores the imperative of coupling stimulative measures with credible fiscal anchors—be it through targeted spending controls, revenue enhancements, or structural reforms—to avoid undermining long-term growth prospects.
As Congress gears up for negotiations in the Senate, JP Morgan economists will be closely monitoring legislative tweaks that could alter the bill’s fiscal footprint. Any rollback of proposed offsets, such as cuts to entitlement programs, could amplify debt risks—whereas modest offsets or sunset provisions might slightly temper the deficit trajectory. In the meantime, investors are bracing for a period of heightened volatility, as the interplay of fiscal largesse, monetary policy calibration, and global headwinds comes into sharper focus.
(Source:www.bloomberg,com)
A Cushion Against Slowing Growth
According to JP Morgan’s top macroeconomic strategists, the new legislation—which extends and expands many provisions of the 2017 Tax Cuts and Jobs Act, raises child tax credits, and introduces targeted business tax relief—will inject roughly $400 billion in additional stimulus into the economy over the next year alone. This surge of liquidity, they argue, could counterbalance roughly two-thirds of the drag imposed by tariffs and supply-chain disruptions that, cumulatively, JP Morgan estimates have shaved about 1 percent off domestic GDP growth year-to-date. By extending tax relief through 2026 and offering retroactive provisions that accelerate refunds, the bill is expected to boost consumer spending and corporate investment in the near term.
“We see headline GDP growth lifting by as much as 0.5 to 0.7 percentage points in the upcoming quarters,” notes Nora Szentivanyi, a senior global economist at JP Morgan. “The timing of retroactive refunds—particularly concentrated in early 2026—should give a welcome jolt to consumption ahead of the mid-term elections.”
Yet the bank’s budget analysts warn that, despite the bill’s stimulative kick, there are scant credible offsets to its cost. JP Morgan projects the reconciliation measure will add between $3.3 trillion and $3.8 trillion to federal borrowing over the next decade. As a result, the deficit is set to climb from around 6.4 percent of GDP in fiscal 2024 to as much as 7 percent over the medium term, lifting the public debt share from just under 100 percent of GDP to nearly 105 percent by 2030.
“These figures assume baseline economic growth and existing spending trajectories,” explains Michael Feroli, the bank’s chief U.S. economist. “Absent significant spending restraint or new revenue measures, debt dynamics will become more challenging, potentially weighing on the government’s ability to respond to future shocks.”
Interest Rates and Inflation Pressures
Higher deficits, JP Morgan cautions, may also constrain the Federal Reserve’s policy toolkit. With fiscal demand surging and supply-side frictions persisting, the bank sees a heightened risk of a “stagflationary” environment—where subpar growth coincides with sustained inflationary pressures. In a recent note, JP Morgan analysts raised the probability of inflation remaining stubbornly above the Fed’s 2 percent target over the next two years, driven in part by large fiscal deficits and geopolitical uncertainties.
“In our baseline, headline CPI drifts back toward 3 percent by late 2025, with core measures sticky around 3 to 3.5 percent,” JP Morgan forecasts. “Real wage gains will be muted, and corporate pricing power remains intact amid constrained supply chains.”
This outlook underpins the bank’s recommendation that the Fed maintain a cautious stance on rate cuts. Although markets have priced in several quarter-point rate reductions by mid-2026, JP Morgan expects only one or two cuts, contingent on clear evidence of disinflation.
The specter of ballooning deficits has already cropped up in bond markets. In May, one of the major credit rating agencies downgraded the United States’ sovereign rating, citing insufficient fiscal reforms. JP Morgan’s credit analysts view this downgrade as a “lagging indicator” of deeper structural challenges. Higher borrowing needs could push Treasury yields higher over the long haul, with JP Morgan projecting the 10-year yield to edge toward 4 percent by year-end, up from roughly 3.7 percent at present.
Equity markets have thus far remained buoyant, driven by strong profit margins and liquidity. Yet JP Morgan warns of growing “complacency” among investors, as the coupling of fiscal expansion and elevated valuations may elevate downside risks. The bank’s portfolio strategists are advising clients to trim duration exposure and selectively rotate toward value-oriented sectors that historically outperform in rising-rate environments.
Global Spillovers
Beyond U.S. borders, JP Morgan’s international research teams highlight potential spillovers. A stronger fiscal impulse in the world’s largest economy could bolster global demand, lifting export-dependent nations. However, if higher U.S. yields lead to persistent dollar strength, emerging markets could face tighter financing conditions and currency pressures. JP Morgan’s emerging-markets team advises benchmark underweights in local-currency government debt in nations with large external financing needs.
While the new tax and spending package promises a short-term fillip for the U.S. economy, JP Morgan’s comprehensive assessment paints a cautionary tale for policymakers and investors alike. The bank underscores the imperative of coupling stimulative measures with credible fiscal anchors—be it through targeted spending controls, revenue enhancements, or structural reforms—to avoid undermining long-term growth prospects.
As Congress gears up for negotiations in the Senate, JP Morgan economists will be closely monitoring legislative tweaks that could alter the bill’s fiscal footprint. Any rollback of proposed offsets, such as cuts to entitlement programs, could amplify debt risks—whereas modest offsets or sunset provisions might slightly temper the deficit trajectory. In the meantime, investors are bracing for a period of heightened volatility, as the interplay of fiscal largesse, monetary policy calibration, and global headwinds comes into sharper focus.
(Source:www.bloomberg,com)