As the deadline approaches for President Donald Trump’s new tariffs, Goldman Sachs is anticipating that these aggressive measures will lead to an increase in inflation and unemployment, potentially causing economic growth to slow significantly.
The investment firm has updated its projections, forecasting that tariff rates could spike by 15 percentage points. This represents a shift from their earlier “risk-case” scenario. The announcement of reciprocal tariffs is expected on Wednesday, though Goldman acknowledges that exclusions for specific products and countries may eventually temper this increase to approximately 9 percentage points.
The Goldman Sachs economic team, under the direction of Jan Hatzius, predicts sweeping negative effects on the economy following the implementation of these trade tariffs.
In a report released over the weekend, the bank remarked, “we continue to believe the risk from April 2 tariffs is greater than many market participants have previously assumed.”
Inflation Above Target
Goldman’s analysis indicates that its preferred core inflation measure, which excludes food and energy prices, may reach 3.5% in 2025, marking a 0.5 percentage point increase from previous estimates and well exceeding the Federal Reserve’s target of 2%.
This rise in inflation is paired with forecasts of sluggish economic growth, including an annualized growth rate of just 0.2% in the first quarter and an overall 1% increase for the full year when comparing the fourth quarter of 2024 to that of 2025. This projection has been revised down by 0.5 percentage points from earlier predictions. Additionally, unemployment is now expected to reach 4.5%, up 0.3 percentage points from the prior estimate.
Given these factors, Goldman anticipates a 35% likelihood of recession within the next year, an increase from the previous 20% estimate.
The forecast raises concerns about the potential for stagflation, characterized by low growth and high inflation, reminiscent of the late 1970s and early 1980s in the U.S. During that time, then-Fed Chair Paul Volcker raised interest rates sharply, causing a recession as the central bank prioritized combatting inflation over supporting economic expansion.
Three Rate Cuts Expected
Goldman’s economists, however, do not foresee a repeat of that scenario. They now project that the Federal Reserve will lower its benchmark rate three times this year, with quarter percentage point cuts, a shift from their earlier estimate of two reductions.
“We have moved the lone 2026 cut in our Fed forecast forward into 2025 and now anticipate three consecutive cuts in July, September, and November,” they noted, maintaining their terminal rate forecast at 3.5%-3.75%, a reduction from the current range of 4.25% to 4.50%.
The specifics of the proposed tariffs are still uncertain, but as reported by the Wall Street Journal on Sunday, President Trump is urging his administration to consider more substantial levies, which might impose an overall tariff of 20% on U.S. trading partners.
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