Despite Trump's sweeping policy adjustments, goldman sachs expects that this will not fundamentally impact the overall economy or mmf policy in the usa. It is anticipated that by the end of 2025, the core PCE inflation rate, excluding tariff effects, will drop to 2.1%, with an annual GDP growth rate of 2.5%, which is higher than the market consensus expectations.

With the conclusion of the 2024 election, Trump returns to the White House, and the usa economy stands once again at a crucial crossroads: on one hand, high tariffs and deportation policies will exacerbate the risks of rising inflation and a tight labor market, while on the other hand, extending tax cuts is expected to stimulate business investment and invigorate the economy.

The goldman sachs report points out that the victorious republicans may bring policy changes in three key areas:

First, we expect import tariffs to increase, raising the effective tariff rate by 3-4 percentage points.

Second, we expect stricter policies to reduce net immigration numbers to 0.75 million per year, slightly below the pre-pandemic average of 1 million per year.

Third, we expect the tax cuts that are set to expire in 2017 to be fully extended, along with moderate additional tax cuts.

Although Trump will make sweeping adjustments to policies, goldman sachs expects that this will not have a fundamental impact on the overall economy or monetary policy in the usa, and its main effects will be limited to specific industries.

Inflation is expected to continue to cool down, unless tariffs are significantly increased.

The impact of Trump's new policies may be most quickly reflected in inflation numbers.

Goldman Sachs pointed out that although current inflation and wage growth are still above target levels, this excess is mainly due to previous price and wage adjustments lagging, and this lag effect has now been almost completely released.

Specifically, the gap between housing prices and rents is narrowing, and government price controls are about to end. For wages, particularly for union members whose wage increases come later due to longer contract terms, their wage growth rate was previously relatively high, but now this gap is also narrowing.

Goldman Sachs expects that by the end of 2025, as wage pressure eases, inflation expectations normalize, and factors catching up to inflation gradually fade, the core PCE inflation rate excluding tariff effects will drop to 2.1%.

Expected tariffs could raise this figure to 2.4%. Goldman Sachs analysis found that for every 1 percentage point increase in effective tariff rates, the core PCE price index will rise by 0.1 percentage points.

The impact of increased tariffs on inflation is limited and primarily one-time, unlikely to lead to sustained inflation increases. However, if the White House does implement a 10% general tariff, Goldman Sachs expects this could raise the inflation rate to slightly above 3%, breaking the stabilization pattern of inflation.

GDP will be dragged down by tariffs in 2025, but is still expected to exceed the market consensus expectations.

Goldman Sachs' baseline forecast believes that policy changes will not have a significant overall impact on GDP in the next two years, and that positive and negative effects will offset each other.

Specifically, increasing tariffs and reducing immigration may somewhat drag economic growth at the beginning of 2025, as these measures would increase the tax burden on businesses, create uncertainty, and could even lead to a tighter financial environment.

However, since businesses may have already anticipated these changes, the tax incentives and boosting of market confidence could quickly promote business investment. Yet, as personal tax cuts require legislative procedures, their stimulating effect on consumer spending may take longer to materialize.

Goldman Sachs estimates that the offsetting effects of the policy will reduce GDP growth by about 0.2 percentage points in 2025, followed by a similar boost in 2026. Despite tariffs causing some drag on early economic performance, Goldman Sachs expects that the GDP growth in the usa in 2025 will still exceed consensus expectations: a year-on-year growth rate of 2.4% in the fourth quarter, and an annual growth rate of 2.5%.

In another risk scenario, if the White House also implements a widespread 10% tariff, there could be a longer delay; even if Congress passes additional tax cuts equivalent to the scale of tariff revenues, the impact on GDP growth would be greater.

The main support behind this expectation is consumer spending; Goldman Sachs believes it remains the core pillar of strong GDP growth in 2025, with a healthy labor market ensuring that real income grows at a robust pace of 2.5%.

The report points out that although the tightening of immigration policies may exert upward pressure on wages and prices in certain industries, the overall impact on wages and prices should be moderate.

Immigration increases both the supply and demand (for labor); although earlier this year we believed that the influx of a large number of low-wage immigrant workers into the tightest labor market in usa's history during peacetime may have somewhat suppressed wage pressures, the current labor market has returned to a more normal balance.

Additionally, Goldman Sachs believes that business investment has received support from specific factors (such as delays in deliveries from boeing), but aside from that, since the previous capital expenditure growth driven by a wave of factory construction has begun to stabilize, overall business investment performance has been relatively weak.

However, it is expected that in 2025, commercial investment will regain growth momentum, primarily due to several factors: investment in new factories and equipment, tax incentives, tax incentives, and a low interest rate environment.

How much further can interest rates drop next year?

In terms of monetary policy, Goldman Sachs expects the Federal Reserve to continue lowering interest rates in the first quarter of 2025, then slow down the rate cuts in the second and third quarters.

We currently expect a series of rate cuts, as we believe the FOMC will slow down the rate cuts after approaching its estimation of neutral interest rates, and after seeing a few months of stabilization in the labor market, which is not yet fully convincing. However, recent comments from Federal Reserve officials have increased the risk of them slowing down rate cuts earlier.

Goldman Sachs' expected terminal rate is 3.25-3.5%, which is 100 basis points higher than the previous cycle. The institution wrote:

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

Two major risks: tariffs and bonds.

Goldman Sachs also reaffirmed its recession forecast, believing that the probability of the USA entering 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 USA economy and market:

Tariffs: A 10% general tariff may push inflation to a peak slightly above 3%. Although this will still be a one-time effect and will depend on whether additional tax reductions are implemented to offset it, it will still drag GDP growth down by 0.75-1.25 percentage points. The impact on monetary policy will be twofold - in 2019, the FOMC prioritized growth risks and lowered the fund rate by 75 basis points.

Debt: When the debt-to-GDP ratio is close to historical peaks and deficits are about 5% above the historically high levels at full economic capacity, with real interest rates across the curve significantly exceeding what policymakers expected in the previous cycle, the market may begin to worry about fiscal sustainability. This topic is increasingly appearing in the market, and any heightened concerns driving bond yields up will emerge at times when high asset valuations may make the market more vulnerable than usual.

Editor/rice