With President Donald Trump set to unveil his latest round of tariffs this Wednesday, Goldman Sachs has issued a stark warning: escalating trade tensions could send inflation soaring, dampen economic growth, and push the U.S. closer to a recession. The investment bank now forecasts a significant 15-percentage-point jump in tariff rates, a scenario that previously seemed like a worst-case outcome but is now appearing increasingly likely. However, over time, Goldman expects country- and product-specific exclusions to bring that increase down to 9 percentage points.

The Economic Domino Effect: Inflation, Growth, and Unemployment

Goldman Sachs’ economic research team, led by Jan Hatzius, predicts a widespread negative impact on the economy once these tariffs take effect. According to their latest analysis:

• Inflation Set to Surge: The core inflation rate—excluding volatile food and energy prices—is now projected to hit 3.5% in 2025, marking a 0.5-percentage-point increase from the prior forecast and well above the Federal Reserve’s 2% target.
• Sluggish Growth Ahead: Economic expansion is expected to slow drastically, with Q1 2025 growth projected at just 0.2% annualized and 1% for the full year, a downgrade of 0.5 percentage points from Goldman’s previous forecast.
• Rising Unemployment: The U.S. job market is also expected to feel the strain, with the unemployment rate now projected to climb to 4.5%, up 0.3 percentage points from earlier estimates.
• Recession Risk Spikes: With inflation rising and growth slowing, Goldman now sees a 35% chance of a recession within the next 12 months, a sharp increase from the previous 20% estimate.

These projections signal a growing risk of stagflation—a troubling economic scenario characterized by sluggish growth, rising unemployment, and persistently high inflation. The last time the U.S. faced such conditions was during the late 1970s and early 1980s when then-Federal Reserve Chair Paul Volcker aggressively hiked interest rates, triggering a recession in an effort to curb inflation.

Trump’s Tariff Strategy: A High-Stakes Gamble

While the full extent of the proposed tariffs remains unclear, reports indicate that Trump is pushing for a more aggressive approach. According to The Wall Street Journal, the administration is considering an across-the-board tariff increase of 20% on all U.S. trading partners, a move that could have far-reaching consequences for businesses and consumers alike.

The U.S.-China trade war, which escalated under Trump’s first term, demonstrated how tariffs can lead to higher consumer prices, disrupted supply chains, and retaliatory measures from trading partners. If the White House proceeds with its aggressive stance, industries ranging from manufacturing and retail to technology and agriculture could be significantly impacted.

How Will the Fed Respond?

Despite concerns over inflation, Goldman Sachs does not anticipate a repeat of Volcker-era monetary tightening. Instead, the firm expects the Federal Reserve to pivot towards rate cuts to counteract the economic slowdown.

• Three Rate Cuts in 2025: Goldman now predicts that the Fed will cut interest rates three times this year, in July, September, and November, each by 0.25 percentage points.
• Revised Interest Rate Outlook: The firm has revised its terminal federal funds rate forecast to 3.5% - 3.75% by year-end 2025, down from the current 4.25% - 4.50%.

If these projections hold, lower borrowing costs could provide some relief to businesses and consumers. However, the effectiveness of these cuts in countering inflationary pressures from tariffs remains uncertain.

Market and Investor Implications

For investors, the evolving trade landscape presents both risks and opportunities:

• Stock Market Volatility: Markets have historically reacted negatively to trade tensions. Investors should brace for potential fluctuations, especially in sectors heavily reliant on international trade.
• Inflation-Protected Assets: With inflation expected to rise, investors may consider diversifying into assets like Treasury Inflation-Protected Securities (TIPS), commodities, and real estate.
• Strong Dollar, Weaker Global Demand: A potential interest rate cut could weaken the dollar, making U.S. exports more competitive but also driving up the cost of imported goods.
• Retirement Portfolios: For retirees and those nearing retirement, portfolio adjustments may be necessary to navigate increased market volatility and inflation risk.

What’s Next?

As the world waits for Trump’s final decision on tariffs, the stakes couldn’t be higher. A dramatic shift in U.S. trade policy could reshape the economic landscape for years to come. With the Federal Reserve poised to adjust monetary policy in response, businesses, investors, and consumers alike must prepare for an uncertain future.

While Goldman Sachs’ forecasts paint a cautious outlook, one thing is certain: the next few months will be critical in determining whether the U.S. economy can withstand the pressures of escalating trade wars or if it will tip into recession.

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