Escalating trade tensions are expected to weigh on US economic output and push up inflation, Goldman Sachs said, as markets grew increasingly concerned about the economic impact of tariffs.

The brokerage's forecast now reflects an assumption of a bigger tariff impact than before.

"We now expect larger tariffs than before, including further product-specific tariffs and a reciprocal tariff that goes beyond simple tariff differentials," Goldman Sachs wrote. "Larger tariffs are also likely to hit (the gross domestic product) harder."

The GDP is now seen growing by an annualized 1.7% in the fourth quarter of 2025, down from Goldman's prior expectation of 2.2%. Its unemployment rate forecast was bumped up by 0.1 percentage point to 4.2%.

The new tariff assumptions imply that core personal consumption expenditures, which is the Federal Reserve's preferred inflation metric, will slightly rise and peak at about 3% on a year-over-year basis, versus "remaining roughly steady" in the 2.5% range previously, Goldman said.

US indexes tumbled intraday Monday, with the Nasdaq Composite plummeting 4.1%.

In an interview with FOX News over the weekend, President Donald Trump reportedly said there would be a "period of transition," and didn't rule out the possibility of a recession in 2025.

On Friday, Trump reportedly issued a fresh threat to impose tariffs on Canadian dairy and lumber products, just a day after issuing temporary exemptions for various goods coming into the US from Mexico and Canada. The White House recently doubled its levy on imports from China, which announced its own retaliatory duties on the US.

The brokerage's 12-month recession probability moved up to 20% from 15%. It wasn't increased more dramatically because the White House "has the option to pull back policy changes if downside risks begin to look more serious," Goldman wrote.

Goldman continues to expect the Fed to cut interest rates twice in 2025 and once in 2026 to a terminal rate of 3.5% to 3.75%. "But under our new tariff forecast, the rationale would have to be 'insurance' cuts rather than 'normalization' cuts," it wrote.