Goldman Sachs has increased its U.S. tariff projections for 2025, now anticipating a rise of 15 percentage points instead of the earlier estimate of 10. This change is linked to the expectation of a “reciprocal tariff” regime averaging 15% on all U.S. trading partners, with an estimated effective impact of a 9-point increase in average tariffs.
Consequently, the firm has revised its year-end 2025 core PCE inflation forecast to 3.5%, reflecting higher import costs. GDP growth is projected to slow to 1.0% on a Q4/Q4 basis, with the unemployment rate expected to rise to 4.5%. The likelihood of a recession has been raised to 35%, attributed to weakening consumer and business sentiment.
Real Income Growth Outlook
Real income growth is expected to decelerate to an average of 1.4% in 2025, indicating a potentially fragile economic phase. Goldman Sachs also suggests the possibility of Federal Reserve rate cuts this year due to concerns over growth.
The revised expectations from Goldman Sachs suggest a sharper-than-anticipated shift in trade conditions next year. The belief is that tariffs on U.S. imports could climb across the board, potentially affecting nearly all trading partners at an average rate of 15%. What this means in practical terms is that imported goods would become noticeably more expensive, feeding directly into consumer prices and, by extension, influencing the measured rate of inflation.
They’ve adjusted their outlook for the core PCE inflation rate—a key metric for the Federal Reserve’s policy decisions—upwards to 3.5% by the end of next year. It’s a clear signal that goods inflation could remain stubbornly higher than ideal, especially in a setting where external pressures are driving price increases. Alongside this, we see a cooling economy: real GDP, when examined from fourth quarter to fourth quarter, is now forecasted to expand by just 1%. That’s a mild pace, especially juxtaposed against past periods of faster post-recovery growth, and it aligns with the broader projection of a softening employment picture.
The expected rise in the jobless rate to 4.5% is notable—it’s far from catastrophic, but it carries implications. We interpret this as a signal that businesses may become increasingly hesitant to hire, particularly if revenues are being squeezed by thinner margins and lower demand. A direct consequence of this is the moderating pace of income gains. Real incomes, that is, income adjusted for inflation, could rise by only 1.4% on average in 2025. This is not enough to comfortably outpace inflation, and it hints at a more cautious consumer in the months ahead.
Federal Reserve Outlook And Market Impact
With inflation still above the Federal Reserve’s target, but growth visibly weakening, policy becomes more complicated. The authors of this research now believe that policymakers may opt to reduce interest rates before the end of this year—not because inflation has come down materially, but rather because of faltering domestic momentum.
From a trading standpoint, the implications are fairly direct. When input costs are expected to rise and growth is projected to slow, volatility around rate expectations tends to escalate. This shift increases the premium on timing. Volatility in inflation-linked instruments may not reflect the full extent of this macro repricing yet. Put simply, it may present opportunities where options are still mispriced relative to forward expectations.
Also, with a higher recession probability now explicitly stated, it’s worth being mindful of correlational breakages in risk-on trades. Hedging strategies that once proved reliable in low-inflation downturns may behave differently when forward policy paths are constrained by elevated core inflation. The subtle change in tone—from policy normalisation to pre-emptive easing—suggests rates markets may begin reflecting recession fears more sharply through flattened curves.
If the past year taught us anything, it’s that such pivots can unfold quickly, reverberating through equities, currencies, and correlations. There are times when patience must pair with positioning. This is likely one of them.
