Goldman Sachs ( GS ) has sounded the alarm bell on the US economy ahead of President Trump's unveiling of reciprocal tariffs later this week.
The takeaway? Trump's so-called "Liberation Day" package could end up liberating the inflation beast.
The president has pledged to unveil universal like-for-like tariffs on April 2. It's unclear what the new tariff rates will be and who they will apply to, as countries have lobbied to be spared from the worst. But Trump last week vowed to place "substantial tariffs" on US trading partners.
The higher tariffs are likely to boost consumer prices, Goldman's chief economist Jan Hatzius wrote in a note to clients on Monday. He lifted his year-end forecast for core Personal Consumption Expenditures (PCE) inflation by 0.5% to 3.5% growth year over year.
The revised forecast reflects an increase in Hatzius's tariff assumptions, which he raised for the second time in less than a month. The economist now expects the average US tariff rate to rise 15 percentage points this year, versus five percentage points in an earlier estimate.
Read more: What Trump's tariffs mean for the economy and your wallet
Hatzius now sees US gross domestic product (GDP) growth averaging 1.5% in 2025, down from previous expectations for growth to average 1.9%. In addition, he sees a 35% chance of a US recession in the next 12 months, compared with 20% previously.
"The upgrade from our previous 20% estimate reflects our lower growth baseline, the sharp recent deterioration in household and business confidence, and statements from White House officials indicating greater willingness to tolerate near-term economic weakness in pursuit of their policies," Hatzius explained.
He added: "While sentiment has been a poor predictor of activity over the last few years, we are less dismissive of the recent decline because economic fundamentals are not as strong as in prior years."
Read more: Are you buying the dip in stocks?
Markets are on edge again as worries about tariffs ripple through corporate America, with the threat of retaliation by trading partners against US exports adding to the potential impact of hiked duties on US imports.
The Dow Jones Industrial Average ( ^DJI ) lost 716 points on Friday, for a drop of about 1.7%. At the same time, the S&P 500 ( ^GSPC ) tumbled nearly 2%, while the Nasdaq Composite ( ^IXIC ) tanked 2.7%. The broad benchmark S&P 500 is down 5% year to date, and tracking toward its worst quarter since September 2022.
Some targeted countries have wasted no time hitting back.
China unveiled a 15% tariff on US chicken, wheat, corn, and cotton products and an additional 10% tariff on sorghum, soybeans, pork, beef, seafood, fruits, vegetables, and dairy products. Canada announced a 25% tariff on 30 billion Canadian dollars of US imports.
Listen: How Build-a-Bear CEO is dealing with Trump tariffs
"I would tell anyone who wants to understand what's going on in markets ... that markets thrive on predictability and they thrive on certainty," former director of the National Economic Council and current IBM vice chair Gary Cohn told me last week on Yahoo Finance's Opening Bid podcast.
"Ambiguity is the No. 1 enemy of a market," Cohn continued. "When a company creates ambiguity in their earnings profile, in their growth profile, in their business model, the market will punish that stock. When politicians, legislators create ambiguity in the way that taxes are going to work, the way that capital gains are going to work, the way that they're going impose tariffs, they create ambiguity to a market and the market as a whole reprices."
Correction: A previous version of this article misstated Jan Hatzius's updated forecast for PCE inflation. The article has also been updated to more precisely state Hatzius's GDP growth forecasts. We regret the errors.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on X @BrianSozzi , Instagram , and LinkedIn