The trade war between the United States and China has sharply intensified in recent days, raising the risk that the bruising battle will drag on through the 2020 presidential election.

Goldman Sachs warned clients on Monday that a trade agreement “now looks far off” because officials in Washington and Beijing are “taking a harder line.”

The Wall Street firm said the most likely outcome is that no deal will be reached before the 2020 election and that President Donald Trump’s threatened 10% tariffs on $300 billion of US goods will remain in place on Election Day.

If accurate, the prediction suggests that the already-hurting global economy will face an extended period of uncertainty and tariffs that will further slow growth. The on-again, off-again nature of the trade conflict between the world’s two largest economies is sapping business confidence and making it difficult for companies to know how and when to invest in the future.

Analysis: Hackers are key to Chinese strategy to dominate Internet of Things, other tech

“While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects,” Goldman Sachs chief economist wrote in the report, “we are now less confident that this is his view.”

In other words, Trump may have decided that his reelection chances could be boosted by cementing the view that he is doing everything possible to make China play fair on trade.

“A scenario where no deal happens between now and the election is increasingly likely,” Ed Yardeni, president of investment advisory Yardeni Research, told CNN Business in an interview. “Trump perceives the US economy is strong enough to withstand even 25% tariffs across-the-board on everything we import from China.”

Trade clash spooks investors

Many investors and CEOs agree with the US administration’s complaints about China’s trade tactics, including the use of non-tariff trade barriers and theft of intellectual property. However, there is growing unease over Trump’s use of tariffs as a negotiating tool.

The trade war has now entered a new and more dangerous phase, raising alarm among investors around the world.

On August 1, Trump vowed to impose tariffs for the first time on a wide swath of consumer goods imported from China, including footwear, electronics and toys.

Currency war: China blinks first, US stock futures rise

China responded on Monday by announcing its companies have halted the purchases of American agricultural goods and by allowing its currency to drop sharply to the weakest level in more than a decade.

The Trump administration fired another shot late Monday by labeling China a currency manipulator, a symbolic move that further inflamed tensions.

“It’s a very complicated game of Chinese checkers they are playing,” said Yardeni. “It’s pretty clear this is not all about trade, nor even just intellectual property. It’s about superpower rivalry.”

The Fed could keep cutting – but how many times?

As that rivalry plays out, the global economy is suffering the consequences. A slowdown in manufacturing activity has worsened as the trade war has deepened.

Global central bankers are coming to the rescue by lowering interest rates, punctuated by the Federal Reserve’s first rate cut since 2008. However, central banks have limited ammo because rates remain near-zero. And it’s not clear that easy money will cure the central problem: trade uncertainty.

Still, Goldman Sachs is now predicting that the deepening trade war, along with the risk of a no-deal Brexit and pressure from the bond market, will force the Federal Reserve to cut interest rates twice more before the end of the year.

“The Fed has been increasingly responsive this year to trade war threats, bond market expectations and global growth concerns,” Hatzius wrote.

He noted that financial conditions have tightened significantly even since the Fed lowered rates on July 31, a reflection of global market turmoil.

The Dow plunged 767 points, or 2.9% on Monday, its worst day of 2019. Markets rebounded tepidly on Tuesday after China took steps aimed at easing fears of a full-blown currency war.

Inflation, opposition could limit cuts

Although Trump has urged the Fed to sharply slash interest rates, Goldman Sachs suggested there is a limit to the easy money coming from the US central bank.

First, Hatzius said that inflation will likely warm by the fall towards the Fed’s 2% inflation goal. That would undercut one of the central justifications for rate cuts.

There could also be rising internal opposition at the Fed toward rate cuts, especially given concerns about the need to maintain the central bank’s independence. Last month’s quarter-point rate cut was opposed by two voting members of the Fed’s rate-setting committee, which is known as the Federal Open Market Committee.

“Some FOMC participants would push back harder against rate cuts” totaling more than one full percentage point, Hatzius wrote, because in the past that amount “has been reserved for situations in which there was a strong chance that the economy was already headed into recession.”