Key Points:
Goldman Sachs raises inflation forecasts to 3.5% for 2025, warning that Trump’s new tariffs could push the U.S. toward stagflation.
GDP growth could fall to just 1%, with unemployment rising to 4.5% as trade disruptions slow economic activity.
Goldman now expects the Federal Reserve to cut rates three times this year to counteract slowing growth.
Markets Brace for Trump’s Trade War Revival
Financial markets are on edge as President Donald Trump prepares to announce a sweeping new round of tariffs on April 2. The global economy is still dealing with the aftershocks of his first trade war during his first term, but this time, Goldman Sachs believes the economic impact could be even worse.
In a research note published Sunday, the investment bank revised its inflation and economic growth projections, warning that Trump’s aggressive tariff strategy could send the U.S. economy into stagflation, a dangerous combination of high inflation and low growth.
"We continue to believe the risk from April 2 tariffs is greater than many market participants have previously assumed," Goldman economists wrote.
So, how bad could this get? Let’s break it down.
Inflation Could Surge Past the Fed’s 2% Target
One of the biggest concerns is inflation. Goldman Sachs now forecasts core inflation (which excludes volatile food and energy prices) will hit 3.5% in 2025, well above the Federal Reserve’s 2% target.
Why? Tariffs drive up the cost of imported goods, leading companies to either absorb the costs (hurting corporate profits) or pass them on to consumers (fueling inflation). The latter is the most likely scenario, meaning everything from cars to household goods could become more expensive.
This inflationary pressure forces the Federal Reserve into a difficult position—it must balance keeping inflation under control while ensuring the economy doesn’t grind to a halt.
Market Reaction:
Bond yields could rise as investors demand higher returns to compensate for inflation risks.
The U.S. dollar might strengthen in the short term due to safe-haven flows, but long-term uncertainty could create volatility.
Stocks could take a hit, especially in sectors reliant on international trade (auto manufacturers, tech, and retail).
Economic Growth Could Fall to Just 1%
Goldman Sachs slashed its GDP growth forecast to just 1% for 2025, down from an earlier estimate of 1.5%.
The reason? Trade restrictions slow down supply chains, reduce consumer confidence, and make businesses hesitant to invest.
A weaker economy could lead to:
Lower corporate earnings → Pressure on stock prices.
Higher unemployment → Less consumer spending, slowing down the economy further.
A decline in industrial production → Factories reduce output due to higher input costs.
With global trade disruptions growing, the U.S. might find itself facing reduced exports, further limiting growth potential.
Unemployment May Rise to 4.5%
Another red flag is the labor market. While unemployment is currently at historic lows, Goldman Sachs now predicts a rise to 4.5% in 2025, up from 4.2%.
Why?
Manufacturing and export-driven industries (autos, semiconductors, heavy equipment) will likely slow hiring or cut jobs due to higher costs.
Consumer demand may weaken, leading businesses to reduce payroll expenses.
Uncertainty in trade policy discourages expansion plans for major corporations.
Historically, tariffs have led to job losses in sectors that depend on international trade. The 2018-2019 U.S.-China trade war, for example, wiped out an estimated 300,000 U.S. jobs.
The Federal Reserve’s Dilemma: Rate Cuts Coming?
The Federal Reserve is already under pressure to cut interest rates in 2025 due to concerns over slowing economic growth. Goldman Sachs now expects three rate cuts this year in July, September, and November, moving the benchmark rate to 3.5%-3.75%.
The logic is simple:
If growth slows, the Fed will want to ease borrowing costs to stimulate investment and hiring.
If inflation remains high, cutting rates could backfire, as looser monetary policy might push prices even higher.
This puts Fed Chair Jerome Powell in a tough spot. A poorly timed rate cut could lead to a further surge in inflation, while delaying action could push the economy closer to recession.
The Federal Reserve’s Dilemma: Rate Cuts Coming?
The Federal Reserve is already under pressure to cut interest rates in 2025 due to concerns over slowing economic growth. Goldman Sachs now expects three rate cuts this year in July, September, and November, moving the benchmark rate to 3.5%-3.75%.
The logic is simple:
If growth slows, the Fed will want to ease borrowing costs to stimulate investment and hiring.
If inflation remains high, cutting rates could backfire, as looser monetary policy might push prices even higher.
This puts Fed Chair Jerome Powell in a tough spot. A poorly timed rate cut could lead to a further surge in inflation, while delaying action could push the economy closer to recession.
Source: FederalReserve.Gov
How Traders Can Position for the Fallout
For traders, the uncertainty surrounding Trump’s tariffs and the Fed’s response creates both risk and opportunity.
1. Watch the U.S. Dollar (USD) Reaction
Short-term: USD may strengthen as a safe-haven currency if markets panic.
Medium-term: If inflation spikes and the Fed cuts rates, USD could weaken significantly.
2. Monitor the Bond Market
If inflation rises, expect Treasury yields to climb as investors demand higher returns.
If the Fed signals aggressive rate cuts, expect yields to drop, potentially boosting risk assets.
3. Look for Stock Market Volatility
Tariff-sensitive sectors like autos, tech, and consumer goods could take a hit.
Gold and other commodities may rise as traders hedge against uncertainty.
Final Thoughts: Markets Face an Uncertain Road Ahead
Goldman Sachs’ latest warning highlights the growing risk of a stagflation-like environment in the U.S. economy. With inflation projected at 3.5%, growth slowing to 1%, and unemployment climbing to 4.5%, traders must prepare for heightened volatility in forex, bonds, and equities.
Key Takeaways:
• Tariffs could fuel inflation, making the Fed’s job harder.
• Economic growth is slowing, putting markets on edge.
• Rate cuts are expected, but timing remains uncertain.
• Markets may become increasingly volatile, expect sharp moves in USD, bonds, and stocks.
With April 2 fast approaching, traders should brace for the next wave of market reactions, because if history is any guide, the impact of Trump’s tariffs could be bigger than expected.