Goldman Sachs recently dropped a pretty serious warning. They warn that some of the more aggressive trade moves being contemplated by the White House would trigger dire economic consequences. According to the investment bank, the administration’s new tariffs will substantially increase inflation and unemployment. Consequently, economic growth will nearly grind to a halt. The firm’s updated projections indicate a widespread harmful effect on the U.S. economy as the measures start to be implemented.
Though some may forget, the U.S. has not encountered stagflation since the late 1970s and early ’80s. Stagflation would be a painful cocktail of stagnant economic growth and high inflation. Indeed, Goldman Sachs just forecast that inflation, as measured by its preferred core measure, will hit 3.5% in 2025. This measure excludes food and energy prices. The firm has since slashed its U.S. GDP growth forecast to just 1% for the year. Simultaneously, it expects national unemployment to climb to 4.5%.
Inflation and Unemployment Concerns
These tariffs would increase inflation at a time when that is going in the wrong direction. Goldman Sachs is forecasting a 15 percentage point increase in average tariff rates. This increase will almost surely be passed on to consumers, causing total inflation to hit 3.5% this year. The company is predicting that unemployment will rise to 4.5%, which would be 0.3 percentage points higher than their previous prediction.
“We continue to believe the risk from April 2 tariffs is greater than many market participants have previously assumed.” – Jan Hatzius
Goldman Sachs’ view is a marked departure from their previous “risk-case” scenario. They say it now looks more likely. As a result, the firm is predicting a rather anemic economic growth of just 0.2% for Q1. For the whole year, they forecast a total rate of 1% growth.
Federal Reserve Rate Cuts
Goldman Sachs is now forecasting that the Federal Reserve will implement gradual cuts to its benchmark interest rate. This is a timely response to our current economic situation. The firm now envisions three cuts this year—in July, September, and November—up from a previous forecast of two.
“We have pulled the lone 2026 cut in our Fed forecast forward into 2025 and now expect three consecutive cuts this year in July, September, and November, which would leave our terminal rate forecast unchanged at 3.5%-3.75%.” – Goldman economists
These tariff counter-cuts in interest rates, targeted at avoiding the upcoming adverse effects of these tariffs, are important to sustaining positive economic growth.
Increased Recession Risk
Goldman Sachs now places the odds of a recession within the next 12 months at 35%. This is a huge increase from their prior estimate of only 20%. This new increased risk assessment acknowledges worries about the potentially destructive effects these trade policies could have on the economy as a whole.
The downplayed danger of the new tariffs Deutsche Bank’s head of global investment research, Jan Hatzius, put a spotlight on the underestimated risks.
“We continue to believe the risk from April 2 tariffs is greater than many market participants have previously assumed.” – Goldman economists