Wall Street dreads economic catastrophe as Trump guardrails erode: 'What is he doing?'

Wall Street is sounding the alarm as Trump's Iran war threatens to crater an already fragile economy, with financial analysts warning the protective guardrails shielding the U.S. from economic catastrophe are rapidly eroding.

Just three weeks into the conflict, the damage is already mounting. Oil prices have exploded past $100 a barrel with no relief in sight, inflation is climbing, hiring has stalled, wage growth is collapsing, and mortgage rates are surging as market anxiety deepens. The Federal Reserve held interest rates steady Wednesday, but the underlying economic picture is darkening by the day, Politico reported.

"The guardrails that protected the U.S. economy from President Donald Trump's policy jolts are wearing thin," according to the report.

Gregory Daco, EY-Parthenon's chief economist, warned of systemic vulnerability. "The U.S. is now confronting inherent fragilities," he said. "The typical buffers that would prevent any type of external shock — like an oil price shock — from disproportionately affecting the economy are smaller than usual."

"Downside risks are rising, and this is an extremely fluid situation," Daco added.

The financial sector is rapidly losing confidence in the administration's economic stewardship, Politico reported. A Bank of America survey of global fund managers released Tuesday found inflation expectations surging, with 28 percent now expecting Democrats to retake both houses of Congress in the midterms — up from just 20 percent a month ago.

Bob Elliott, CEO and CIO of investment firm Unlimited Funds, expressed the shift in sentiment bluntly. "Until this war happened, everyone thought we were going to have a pretty good growth year," he told Poltico. "Now it's pretty clear that growth is going to be soft."

Even Republican insiders are panicking. "The thing that underlines every strong economy is consistency and progress, and things that promote confidence, and I just don't see any of those attributes being displayed on a disciplined, routine basis by the White House," said Chuck Coughlin, a veteran Republican strategist in Arizona. "Most of the country is looking at the president, going: 'What is he doing?'"

Goldman Sachs has now pegged the odds of a U.S. recession within the next year at 25 percent. Other major banks are warning that inflation and growth risks look far more acute than they did just weeks ago, before oil prices started soaring.

The longer Iran keeps the Strait of Hormuz disrupted, the worse the economic fallout becomes. Release of global oil reserves, sanctions relief, and political risk insurance for tankers cannot fully offset the cascading damage to global supply chains and GDP.

Andrew Hollenhorst, chief U.S. economist at Citi, summed up the deteriorating picture before Wednesday's Fed meeting: "Things look a little bit weaker than before. Once an oil shock is added to the equation, it's a really unpleasant combination of data and events."

You can read more from Politico here.