Federal Reserve Chair Jerome Powell last week pushed back when asked whether stagflation posed a threat to the U.S. economy. His successor may face a tougher challenge, as Wall Street forecasters raise their expectations of recession, brought on in part by the Iran war and potential for higher prices.

In recent days, economists have pulled up their risk assessments of a U.S. contraction amid heightened uncertainty over geopolitical risk and a labor market that for the past year has shown strains over the past year.

Moody’s Analytics’ model has raised its recession outlook for the next 12 months to 48.6%. Goldman Sachs boosted its estimate to 30%. Wilmington Trust has the odds at 45%, while EY Parthenon has it at 40%, with the caveat that “those odds could rapidly rise in the event of a more prolonged or severe Middle East conflict.”

In normal times, the risk for a recession in any given 12-months span is around 20%. So while the current predictions are hardly certainties, they signify elevated risk.

The situation poses a tough challenge for policymakers who are being asked to balance threats to the labor market against sticky inflation.

“I’m concerned recession risks are uncomfortably high and on the rise,” said Mark Zandi, chief economist at Moody’s Analytics. “Recession is a real threat here.”

Talk of an economic contraction has accelerated as the war with Iran has dragged on.

An oil shock has preceded virtually every recession the U.S. has seen since the Great Depression, save for the Covid pandemic. Prices at the pump have risen by $1.02 a gallon over the past month, an increase of 35%, according to AAA.

While economists still debate the pass-through impact from higher energy, the trend has held.

“The negative consequences of higher oil prices happen first and fast,” Zandi said. “If oil prices stay kind of where they are through Memorial Day, certainly through the end of the second quarter, that’ll push us into recession.”

Like his fellow forecasters, Zandi said his “baseline” expectation is that the warring sides find a diplomatic off-ramp, oil flows again through the Strait of Hormuz and the economy can avoid a worst-case scenario.

To be sure, economists as a lot are negative and subject to the old trope about predicting nine of the last five recessions. Markets also have been wrong about where the economy is headed. A portion of the yield curve — or the spread between various Treasury maturities — most closely watched by the Fed has sent repeated false recession signals for much of the past 3½ years.

But the threat of a prolonged war, pressure on a consumer who drives more than two-thirds of all growth, and a labor market that created virtually no jobs in 2025 collectively raises the risk that the expansion could falter.

“That path through is increasingly narrow, and it’s getting increasingly difficult to see the other side,” Zandi said.

Consumers also are pessimistic. Consumer site NerdWallet said its March survey showed 65% of respondents expect a recession in the next 12 months, up 6 percentage points from the month before.

Beyond energy prices, economists say the labor market is a key pressure point.

The U.S. economy created just 116,000 jobs for all of 2025 and lost 92,000 in February. While the unemployment rate has held steady at 4.4%, that’s largely been because of a dearth of firing rather than a burst in hiring.

Indeed, stocks have had a rough ride during the war. The Dow Jones Industrial Average has fallen more than 5% during the hostilities — important because consumer spending and sentiment have been supported by higher-income households benefiting most from rising equity prices.

Gross domestic product is on track to grow at a 2% pace in the first quarter, according to the Atlanta Fed’s GDPNow tracker of rolling data. However, that’s coming off an increase of just 0.7% in the fourth quarter, the product in part of the government shutdown. Economists had expected that the drain on growth in Q4 would translate to a boost in Q1, but the effects of that appear to be modest.

Still, if global leaders can find an end to the war soon, the economy again is expected to skirt the gloomiest predictions. Stimulus from the One Big Beautiful Bill in 2025 is projected to goose growth, with lower regulations and a boost in tax returns that could help consumers cope with elevated prices. A sustained rise in production also is a factor in the economy’s favor.

“There is support underneath,” said North, the Allianz economist. “That makes me real hesitant to use the ‘R’ word. But certainly, I think we’re seeing a slowdown this year.”

Chicago Federal Reserve President Austan Goolsbee said Monday that he’s more worried about inflation now than he is unemployment, even with apparent progress made on the war with Iran.

In a CNBC interview, the central banker said policymaking is difficult in the current environment. He spoke shortly after President Donald Trump announced that progress had been made in negotiations with Iran and that further attacks on energy infrastructure would be halted for five days as talks continue.

“The most important thing is to figure out the through line of what is happening,” Goolsbee said in a “Squawk Box” interview. “What makes this a fraught but intense moment is nobody can tell us what is going to happen on the ground in the conflict in the Middle East, and how long that lasts.”

Goolsbee had dissented on a rate cut in December and said he agreed with the majority to hold short-term rates steady at the January and March meetings of the Federal Open Market Committee. He is not an FOMC voter this year but will vote again next year.

Following Monday’s war news, traders, in volatile market action, upped bets of a rate hike by the end of the year but still expect a cut in 2027. Stocks spiked higher and oil prices plunged.

FOMC officials last week indicated a majority still expect a cut this year and another the next. However, Goolsbee said that his inclination will depend on the progress of inflation, and he cautioned against “a repeat of the team-transitory mistake” where the Fed underestimated the severity of inflation in 2021.

“I remain fairly optimistic that by the end of ’26 rates could go down, but I wanted to see proof that we’re back on an inflation headed to 2%. This [war] definitely throws a wrench into the plans. We do need to see progress,” he said.

British government borrowing costs surged to their highest since the 2008 financial crisis on Friday, as investors scrambled to price in rising inflation risks and a growing probability of interest rate hikes later this year.

U.K. government bonds – known as gilts – have undergone a sharp repricing amid the escalation of the Iran war. Yields on the benchmark 10-year gilt have jumped around 68 basis points in the 15 trading days since the conflict began, while the yield on the 2-year gilt has added about 97 basis points.

Bond prices and yields move in opposite directions.

On Friday, the yield on the U.K.’s 10-year government bonds moved around 9 basis points higher to 4.933%, its highest level since the 2008 financial crisis.

Meanwhile, yields on 2-year gilts jumped 11 basis points to around 4.513%, marking their highest level in more than a year.

Britain’s bond market has been particularly susceptible to fears of resurgent inflation as the U.S.-Iran war drags on, in part because of its reliance on imported energy. The war, and the subsequent blockade in the Strait of Hormuz – a critical oil shipping route – has led to a surge in oil and gas prices.

Even before the war broke out, the U.K. had the highest government borrowing costs of any G7 nation, with long-term 20- and 30-year gilts trading well above the crucial 5% threshold. The yields on those bonds jumped by around 9 and 7 basis points, respectively, on Friday.

Nigel Green, CEO of financial advisory deVere Group, told CNBC markets were rapidly unwinding expectations of rate cuts from the Bank of England.

On Thursday, the central bank’s Monetary Policy Committee said it had voted “unanimously” keep its benchmark interest rate on hold, saying inflation would be higher in the near term “as a result of the new shock to the economy.”

Before the war began, the BOE had been expected to cut its key interest rate. Now, markets are pricing in a near 0% chance of a rate cut from the bank this year, with the vast majority of traders seeing a rate hike next month, LSEG data shows. Markets are also overwhelmingly pricing in a key rate of at least 4.25% by the end of the year, which would suggest a minimum of two rate hikes.

“The trigger is energy, as oil and gas shocks are feeding directly into inflation expectations, and gilts are reacting exactly as you would expect in this scenario,” deVere’s Green told CNBC via email. “This isn’t a disorderly sell-off — it’s an understandable repricing of risk.”

There was “also a political layer” to movements seen in gilt markets, according to Green.

“Finance minister Rachel Reeves has built her fiscal framework around stability and credibility, but higher yields quickly translate into higher borrowing costs,” he said. “This, of course, narrows her room for maneuver at precisely the moment pressure is building for additional support on energy and households.”

The bond market has largely been supportive of Reeves’ commitment to her so-called “fiscal rules” during her tenure as finance minister, with speculation that she may be fired from the job last year triggering a gilts sell-off.

Adding to selling pressure on Friday, official figures showed the UK government borrowed a higher-than-expected £14.3 billion ($1.74 billion) in February.

Reeves has committed to bringing day-to-day government spending to a level where it can be funded by tax revenues rather than borrowing, with her rules also saying that public debt must be falling as a share of economic output by 2029-30.

“From an investment perspective, higher yields are starting to restore value in parts of the curve,” Green added. “But volatility will remain elevated while energy markets dictate the inflation outlook.”

George Godber, Fund Manager, Polar Capital U.K. Value Opportunities Fund, told CNBC’s “Squawk Box Europe” on Thursday that his team was avoiding any knee-jerk reactions to the news flow around the conflict.

“The duration of this impact is deeply unknown … In these times, history would tell you the best thing to do is keep calm,” he said. “What we’ve done is very little.”

Europe’s sovereign bonds are facing “a perfect storm” after new inflation fears sparked by the Iran conflict forced the region’s central banks to signal a new course for interest rates on Thursday, sending yields soaring.

The Bank of England left interest rates unchanged at 3.75% on Thursday, with the European Central Bank also holding steady on borrowing costs, as the economic impact of soaring energy costs hangs over rate-setters.

Yields on 10-Year Gilts, the benchmark for U.K. government debt, rose more than 13 basis points to 4.871% — a new 52-week high on Thursday — before easing.  The yield on 2-Year Gilts, which are typically more sensitive to rates decisions, immediately surged 39 basis points in the biggest rise since former Prime Minister Liz Truss’s ‘Mini Budget’ in September 2022.  They were last seen 27 basis points higher, at 4.378%.

French, German and Italian bonds saw less severe selling pressure, but yields rose across the continent.

Market strategists say the BoE’s move — a unanimous call by its nine-member monetary policy committee — effectively ends hopes of any further rate cuts this year and dramatically shifts the policy outlook from where it was just two weeks ago.

Ed Hutchings, head of rates at Aviva Investors, said that the chances of a rate hike from the BoE over the coming months have increased.

“With this in mind, from an asset allocation perspective, we could start to see investors tactically adding overweights in gilts in the short-term, with at least one hike expected later in the year as of today,” Hutchings said.

Matthew Amis, investment director, rates management at Aberdeen Investments, described the unfolding environment as a “perfect storm” for Europe’s sovereign bond markets.

“Energy prices spiking higher and the Bank of England opening the door to potential rate hikes have seen gilts spike higher. German bunds are the relative calm in this storm but are still pushing 3% due to similar inflation fears,” Amis told CNBC via email.

“Gilts and bunds are pricing in a much longer conflict than other markets, focusing on the inflation surge with markets yet to focus on the potential negative impact on growth.”

Meanwhile, the ECB’s next move will now likely be a hike, according to Simon Dangoor, deputy chief investment officer of fixed income and head of fixed income macro strategies at Goldman Sachs Asset Management.

“The governing council is clearly sensitive to upside inflation risks, but will likely look to assess potential second-round effects before making a move,” Dangoor said. “A hike is therefore possible later in 2026; however, the ECB stands ready to act sooner if the situation deteriorates.”

Wholesale prices rose sharply in February, providing another sign that inflation continues to percolate even aside from rising energy costs.

The producer price index, a measure of pipeline costs that producers receive for their products, increased a seasonally adjusted 0.7% on the month, the Bureau of Labor Statistics reported Wednesday. Excluding volatile food and energy costs, the so-called core PPI increased 0.5%.

Economists surveyed by Dow Jones had been looking for increases of 0.3% for both measures.

For the all-items index, prices rose faster than the 0.5% pace in January. However, the core increase was less than the 0.8% for the prior month.

On a 12-month basis, headline PPI inflation was at 3.4%, the most since February 2025, while core was at 3.9%, according to the BLS. The Federal Reserve targets inflation at 2%.

Stock market futures slipped following the report while Treasury yields were higher. Futures traders pushed out the next Fed interest rate cut until at least December.

The surge in PPI came due in large part to a 0.5% increase in services costs, something the Fed would not welcome. Policymakers have attributed much of the recent run-up in inflation to tariffs, which would not show up as much on the services end. Portfolio management fees, a key driver for services costs within the PPI measurement, were up 1% in February. Similarly, prices for securities brokerage, dealing, investment advice and related services accelerated 4.2%.

Goods prices rose 1.1% on the month.

Food prices rose 2.4% while energy was up 2.3%. Within food, the index for fresh and dry vegetables soared 48.9%.

The report suggests that pipeline inflation pressures remain persistent, particularly on the services side, complicating the Fed’s path as it weighs how long to keep interest rates elevated.

The report comes with inflation worries accelerating amid the fighting in the Middle East. The U.S. and Israel continue to strike at targets in Iran, causing energy prices to surge. Oil has been trading around $100 a barrel, up more than 70% year to date as the conflict has proceeded.

None of the inflation data so far has captured the price increases associated with the war. But it has indicated that even before the attacks, inflation was a problem. A report last week indicated that consumer prices rose at a 2.4% rate in February. Separately, the Commerce Department said its main inflation gauge, which the Fed uses as its forecasting tool, was at 3.1% for core and 2.8% for headline.

Later Wednesday, the Fed will release its latest interest rate decision. Market participants consider it a near certainty that central bankers will vote to keep their benchmark overnight interest rate anchored in a range between 3.5%-3.75%, where it has been since the last cut in December 2025.

American consumers and businesses are taking most of the hit from President Donald Trump’s tariffs, New York Federal Reserve President John Williams said Tuesday in remarks that counter White House claims.

“The tariffs have overwhelmingly been borne domestically — a New York Fed analysis estimates that most of the burden has fallen on U.S. firms and consumers.,” Williams said in remarks for a conference in Washington, D.C. “In addition, the tariffs have already meaningfully increased U.S. prices of imported goods, and the full effects have likely not yet been felt.”

The study Williams cited has generated a fair amount of controversy over the past few weeks.

In a white paper published on the New York Fed’s website, a team of researchers found that as much as 90% of the added cost from tariffs has been passed on to domestic producers and consumers. Trump and other White House officials had insisted that exporters would absorb the costs rather than raise prices.

National Economic Council Director Kevin Hassett flamed the controversy during a CNBC appearance in which he suggested that the researchers should be “disciplined” for what he termed was “the worst paper I’ve ever seen in the history of the Federal Reserve system.” Hassett later stepped back the criticism.

Addressing the issue for the first time publicly, Williams said not only were the tariffs being felt at home, but they also were keeping the Fed from reaching its 2% inflation goal.

“My current estimate is that, to date, the increase in tariffs has contributed around one half to three quarters of a percentage point to the current inflation rate of about 3 percent,” he said. “The FOMC defines price stability as 2 percent inflation over the longer run. Owing to the effects of tariffs, progress toward that goal has temporarily stalled.”

On the bright side, Williams said he still expects the tariff impact on inflation to be temporary, and he sees the Fed hitting its target by 2027. He added that the U.S. economy “appears to be on a good footing.”

As for current policy, he said it is “well positioned” for the Fed to hit its dual mandate goal of steady prices and full employment. Should inflation progress lower after the tariff impact fades, “further reductions in the federal funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive.”

Markets expect the Fed to resume cutting later this year, possibly in July or September, according to current futures pricing. As New York Fed president, Williams carries extra influence on the Federal Open Market Committee, where he is a permanent voting member.

Chicago Federal Reserve President Austan Goolsbee said Tuesday that interest rate cuts aren’t appropriate until there’s more evidence that inflation is on its way down.

With recent indicators showing that inflation well off its highs but still above the Fed’s 2% target, Goolsbee noted that policymakers “have been burned by assuming transitory inflation” in the past and shouldn’t make the same mistake again.

“I feel that front-loading too many rate cuts is not prudent in that circumstance,” he said in remarks before the National Association for Business Economics at its annual gathering in Washington, D.C. “People express that prices are one of their most pressing concerns. Let’s pay attention. Before we cut rates more to stimulate the economy, let’s be sure inflation is heading back to 2%.”

The most recent inflation data, for December, showed core inflation, which excludes volatile food and energy prices, running at 3%, as measured by the consumption expenditures price index, the Fed’s primary forecasting gauge. That was up 0.2 percentage point from November and came somewhat due to tariffs, which are viewed as temporary, but also from underlying pressures in the service sector and areas not directly impacted by the duties.

Specifically, Goolsbee said stubbornly high housing inflation isn’t tariff driven, emphasizing the need for the Fed to be “vigilant.”

Goolsbee noted that a 3% inflation rate “is not good enough — and it’s not what we promised when the Federal Reserve committed to the 2% target. Stalling out at 3% is not a safe place to be for a myriad of reasons we know all too well.” He has said previously that he thinks the Fed will be able to cut later in the year.

The remarks come with markets expecting the Federal Open Market Committee, of which Goolsbee is a voter this year, to stay on hold until at least June and probably July. Futures traders are placing about a 50-50 chance of a cut in June and about a 71% probability of a July cut, according to the CME Group’s FedWatch gauge. The Fed enacted three quarter-percentage-point cuts in the latter part of 2025.

Fed Governor Christopher Waller, who has been an advocate for lower rates, took a more measured approach Monday while also speaking to the NABE conference.

Though Waller said he thinks policymakers should “look through” tariff impacts, he said recent data show the labor market may be in better shape than previously indicated, mitigating the need for further cuts. If the jobs picture continues to improve, that would further lessen the case for cuts, though he said he isn’t convinced that the January nonfarm payrolls data wasn’t “more noise than signal.”

Tuesday will be an active day Fed speakers, with Governor Lisa Cook also due to present to the NABE later in the morning.