Wall Street is downgrading US economic growth forecasts for 2025 as the Iran war clouds the outlook, with analysts now projecting higher inflation and unemployment. Major banks are recalibrating their models, with recession probabilities climbing from earlier estimates of around 30% to levels approaching 40%, according to recent market research.

Inflation expectations have surged alongside the deteriorating growth projections, with economists now anticipating core inflation could exceed 3% this year. The labor market faces mounting pressure, with unemployment forecasts creeping upward from 4.1% to 4.3%. These revisions reflect growing concerns about supply chain disruptions and energy price volatility stemming from Middle East tensions.

The economic reassessment comes as Federal Reserve policymakers grapple with conflicting signals. While the central bank has signaled patience on rate cuts, the deteriorating outlook may force a policy pivot. Market participants are increasingly pricing in the possibility that the Fed could need to cut rates aggressively if growth slows sharply, though such moves risk fueling inflation further.