Goldman Sachs Warns of Delayed Tariff Impact, Dollar Devaluation

Goldman Sachs has cautioned that the adverse effects of tariff policies on the U.S. economy may not become evident until mid-May or early June. This delay is attributed to the possibility of U.S. consumers engaging in advance purchasing, which could temporarily boost consumption expenditure data for March and parts of April. This preemptive buying behavior is expected to obscure the true economic impact of the tariffs, leading to a delayed manifestation of the negative effects.

The firm's analysis suggests that the structural devaluation of the U.S. dollar is likely to become a significant trend as the economic repercussions of the tariff policies unfold. The delayed impact is due to the lag between policy implementation and its full effect on economic indicators. This lag is particularly pronounced in sectors that rely heavily on consumer spending, where advance purchasing can artificially inflate short-term data.

Goldman Sachs highlights that the current period is marked by high uncertainty, with key variables including the outcome of tariff negotiations and their impact on global growth and the labor market. Despite temporary relief from tariff suspensions and ongoing negotiations, significant tariffs remain in place. Even if negotiations lead to reductions, it is unlikely that tariffs will fall below a baseline level of 10%.

The firm notes that the Federal Reserve is currently in a reactive rather than proactive stance due to the inflationary pressures caused by tariffs and the uncertainty surrounding trade and fiscal policies. The Fed may only respond to actual deterioration in economic data, with the most likely trigger being a worsening labor market. Therefore, market participants should closely monitor employment-related data in the coming months.

In a recession scenario, Goldman Sachs believes the Federal Reserve could rapidly and significantly lower interest rates by more than 200 basis points. This scenario suggests that market pricing for the Fed's policy may see a significant reversal in the second half of 2026 and 2027. However, the current challenge lies in determining the timing of the first rate cut.

Goldman Sachs also points out that the broad theme of capital flows is influencing the dollar's trajectory. Over the past few years, the U.S. has attracted significant private capital inflows into its assets. However, this trend may reverse as leveraged investors holding unhedged U.S. assets face increased hedging costs, and future marginal demand for U.S. assets may shift. Despite this, the over-allocation to U.S. assets, which took years to build, may also take years to unwind.

Goldman Sachs' chief economist, Jan Hatzius, has also warned of further dollar devaluation. Hatzius notes that the dollar's valuation remains high, with its real value exceeding its average level by nearly two standard deviations since the start of the floating exchange rate era in 1973. Historically, similar valuation levels have led to dollar depreciation of 25-30%. Hatzius also highlights that non-U.S. investors' high holdings of U.S. assets could exacerbate dollar devaluation pressures if they begin to reduce their positions. Additionally, the U.S.'s $1.1 trillion deficit requires a corresponding net inflow to balance, which could lead to either a decline in U.S. asset prices or dollar devaluation, or both.