How does Trump affect the U.S. economy in 2025? Goldman Sachs: Inflation "falls first and rises later," economy "weak at first and strong later"

With the conclusion of the 2024 election, Trump returns to the White House, and the U.S. economy once again stands at a critical crossroads.

Goldman Sachs believes that although Trump's tariff policy may raise inflation, the U.S. economy is expected to gradually accelerate growth by 2025 as consumer spending and business investment recover.

Earlier, an analyst team led by Goldman Sachs Chief Economist Jan Hatzius released a report indicating that the Republican Party's significant victory could bring policy changes in three key areas: raising import tariffs, tightening immigration policies, and extending and introducing more tax cuts.

Although the short-term effects of these policies are significant, Goldman Sachs expects that, in the long run, there will not be major changes in the trajectory of the U.S. economy or Federal Reserve monetary policy.

Inflation "First Decrease Then Increase"

The impact of Trump's new policies may be reflected in inflation data the quickest.

As wage pressures ease and inflation expectations normalize, Goldman Sachs expects that by the end of 2025, the core PCE inflation rate (excluding tariff impacts) is likely to drop to 2.1%, while including the expected tariff impacts, the inflation rate will be raised to 2.4%.

However, Goldman Sachs believes that this inflation increase caused by tariffs is a one-time price level effect and will not prevent the ongoing downward trend in inflation.

In terms of monetary policy, Goldman Sachs expects the Federal Reserve to continue cutting interest rates in the first quarter of 2025, then slow the pace of rate cuts in the later stages of the easing cycle, with an expected final rate of 3.25-3.5%, which is 100 basis points higher than the previous cycle. Goldman Sachs stated:

This is because we expect the FOMC to continue to raise its estimate of the neutral rate, and non-monetary policy tailwinds, particularly large fiscal deficits and resilient risk sentiment, are offsetting the impact of high interest rates on demand.

Economy "Weak First, Strong Later"

Goldman Sachs pointed out that the impact of policy changes on U.S. GDP is expected to show offsetting effects over the next two years. Specifically, the policies of raising tariffs and expelling immigrants may drag down economic growth in early 2025, but in the long term, the implementation of tax cuts may boost consumption and investment.

Nevertheless, Goldman Sachs still expects U.S. GDP growth in 2025 to exceed the consensus market expectation: a year-on-year growth rate of 2.4% in the fourth quarter, with an annual economic growth rate of 2.5%.

Analysts wrote in the report:

Consumer spending should remain a strong growth pillar, supported by real income growth driven by a solid labor market and further boosted by the wealth effect.

Even as the factory construction boom fades, business investment should rebound, driven by new factory equipment spending, AI investments, tax incentives, improved confidence, and lower interest rates.

Goldman Sachs also reiterated its recession forecast, believing that the probability of the U.S. economy entering a recession in the next 12 months remains low at 15%, roughly at the historical average. However, while optimistic, Goldman Sachs emphasized two risks facing the U.S. economy and markets: tariffs and debt.

Among them, a 10% universal tariff could push inflation slightly above a peak of 3% and hit GDP growth harder; additionally, rising debt and deficits, along with high real interest rates, could raise market concerns about U.S. fiscal stability.