Catenaa, Monday, March 31, 2025– Goldman Sachs expects the Federal Reserve to have three 25 bps interest rate cuts in 2025 while it upgrades its 12-month recession probability to 35% as Liberation Day approaches.
The Wall Street brokerage said in a note on Sunday that now it sees consecutive cuts in July, September, and November, compared to its previous forecast of two cuts in June and December.
It anticipates a 15 percentage point increase in tariff rates, a scenario previously considered a “risk-case” but now seems more probable with Trump’s upcoming reciprocal tariff announcement on Wednesday.
The brokerage says the comments from White House officials suggest there is tolerance for short-term economic weakness to achieve their policy goals.
It also now sees a 12-month recession probability of 35%, compared to its previous estimate of 20%.
The Fed maintained its benchmark interest rate at 4.25-4.50% in March, with Chair Jerome Powell noting “unusually elevated” uncertainty and challenges in economic projections due to recent policy changes by the Trump administration.
The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred price gauge, increased 0.3% in February after advancing by an unrevised 0.3% in January, data showed on Friday.
The expected slowdown in the U.S. economy also prompted Goldman Sachs to raise its year-end 2025 unemployment rate forecast to 4.5%.
The bank also lifted its year-end 2025 core PCE inflation forecast to 3.5% year-on-year while also lowering its 2025 GDP growth forecast to 1.0%.
“While the Fed leadership has downplayed the rise in inflation expectations so far, we think it does raise the bar for rate cuts and in particular puts greater emphasis on a potential increase in the unemployment rate as a justification for cuts,” Goldman said adding that they continue to believe the risk from April 2 tariffs is greater than many market participants have previously assumed.
