"US, 45% chance of heading into recession" Goldman Sachs predicts Fed rate cuts to boost economy
Goldman Sachs economists raised the possibility of a recession and predicted that the US Federal Reserve could cut interest rates more quickly following the Trump administration's tariff announcement.
Economists lowered their forecast for fourth-quarter GDP growth in Q2 2025 to 0.5% from 1% and increased the probability of a 12-month recession to 45% from 35%.
This follows "a sharp tightening of financial conditions, foreign consumer boycotts and a continued increase in policy uncertainty that is likely to reduce capital spending by more than we had previously assumed," they said.
According to analysts, the baseline forecast still relies on the assumption that the effective US tariff rate will increase by 15 percentage points in total, which would require a large reduction in tariffs scheduled to take effect on April 9.
If most of the April 9 tariffs go into effect, they said, then the effective tariff rate would rise by about 20 basis points when those increases and potential sectoral tariffs take effect, even allowing for some country-specific agreements at a later date.
"If that is the case, we expect to change our forecast to a recession," they said.
On the current, non-recessionary basis, Goldman economists said they expect the Fed to create a package of three consecutive 25-basis-point "cuts," starting in June rather than July, to lower the funds rate to 3.5-3.75%.
"In a recession scenario, we would instead expect the Fed to cut by about 200 basis points over the next year," they said. "Our probability-weighted Fed forecast now implies 130 percentage points of rate cuts this year, up from 105 previously expected, reflecting our increased probability of a recession," the economists said.
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