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.”

Moody’s Ratings on Monday downgraded a private credit fund run by KKR and Future Standard to junk amid rising bad loans and a string of weak earnings.

The ratings firm lowered the debt ratings of FS KKR Capital Corp by one notch to Ba1 from Baa3 — pushing it into “junk” territory — saying that the fund’s underlying asset quality had worsened more than its peers.

Non-accrual loans, meaning borrowers who have stopped making payments, rose to 5.5% of total investments at the end of 2025, one of the highest rates among rated BDCs, according to the report.

“The downgrade reflects FSK’s continued asset quality challenges, which have resulted in weaker profitability and greater net asset value erosion over time relative to business development company (BDC) peers,” Moody’s said, referring to the fund by its ticker.

Shares of FSK dropped 4% in morning trading. They’ve plunged by more than 30% this year.

The move by Moody’s is the latest sign of distress in the private credit world. Retail investors have been rushing to withdraw funds, running into gates amid concerns about upcoming credit losses, especially related to software loans. Asset managers from Blackstone to Blue Owl have had to contend with elevated redemption requests for their private credit funds, a potential turning point for a category that has seen explosive growth in the past decade.

FSK, which lends to private, middle-market U.S. companies, became the second-largest publicly traded BDC when it was formed through a merger of two predecessor funds in 2018.

Funds like FSK issue debt to help juice returns, so the Moody’s downgrade could increase its borrowing costs and, therefore, lower future returns.

“FSK remains well positioned despite the decision,” a spokesperson told CNBC in an email. “It has a strong, well‑laddered liability structure with no 2026 unsecured maturities and limited near‑term maturities, enabling us to continue supporting our portfolio companies and navigate the current market environment.”

Moody’s also flagged other aspects of the fund that could expose it to greater losses over time, including higher leverage, a higher proportion of payment-in-kind loans, and a lower percentage of first-lien loans than peers.

FSK posted a net loss of $114 million in the fourth quarter and earned just $11 million in net income for all of 2025, according to Moody’s.

The fund’s largest single category of loans is for software and related services, which made up 16.4% of exposure at yearend.

Hyperscalers are significantly ramping up their AI capex spending — and increasingly using credit markets to fund it.

But investors say this shift is challenging mega-cap tech giants’ so-called ‘fortress balance sheet’ status, and rips up what they call the “unspoken contract” that kept speculative AI spending largely separate from debt markets.

After Amazon, Meta and Google-owner Alphabet all unveiled sizable increases in their full-year capex spending plans during earnings season, UBS data indicates that aggregated capex spend among AI hyperscalers could top $770 billion in 2026 — some 23% higher than previously expected.

In a Feb. 18 note, UBS credit strategists said such increases imply a $40 billion to $50 billion ramp-up in borrowing from hyperscalers, pushing public market debt issuance to between $230 to $240 billion this year.

Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, said this tilt toward the bond market is dramatically shifting the dynamic between hyperscalers and investors.

“For years, we’ve been told this AI spend would be funded by generated cash flow — that it is equity risk, it is speculative, and not to worry about it from a credit point of view,” Cattermole told CNBC in an interview.

“There now seems to be a change in the unspoken contract that while we would continue to lend to these businesses, really AI capex was still going to be equity or cash funded….By bringing capex spend into the debt markets, you now have the question of credit worthiness.”

Last September, Oracle tapped the bond market for some $18 billion in one of the biggest debt issuances on record. Others have rapidly followed, with Google-owner Alphabet recently issuing some $20 billion in debt, including a rare 100-year sterling-denominated bond.

“What if, in three years, these Nvidia chips get outstripped by a Chinese competitor, and I’m lending for five or eight years, and in year three, my data center is obsolete?” he said.