According to Morgan Stanley economists, the risk of a recession in the U.S. is growing rapidly, as stubbornly high inflation threatens to weigh on economic activity.
In a Monday analyst note, Bank strategists lifted their forecast of a recession in the next 12 months to 27%, a rise from March when they projected just a 5% chance of a downturn this year. The Federal Reserve will not be able to achieve the elusive soft landing, which is the sweet spot between curbing consumer demand and cooling inflation without crushing economic growth as it raises interest rates, the increased probability of a downturn comes amid concerns that it will be unable to achieve the elusive soft landing.
The probability of a hard landing in the next 12 months has jumped to 27%, according to Lisa Shalett, Morgan Stanley Wealth Management's chief investment officer.
The growth in the U.S. is already slowing. The Bureau of Labor Statistics report earlier this month that gross domestic product fell unexpectedly in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still in the throes of the COVID-induced recession.
The analysis comes amid growing fears on Wall Street that the Fed could cause the economy to go into a recession as it seeks to tame inflation, which remained elevated at 8.3% in April. Along with former Fed chairman Ben Bernanke, Wall Street firms are forecasting a downturn in the next two years, along with Bank of America and Fannie Mae and Deutsche Bank.
Inflation is widening out and has the potential to stay higher for longer, according to Shalett. This scenario puts upward pressure on longer-run inflation expectations and keeps the Fed in a policy acceleration mode. The Fed is under increasing pressure to cool demand and prices, but is facing the difficult task of doing so without crushing economic growth. Policymakers raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades, and have signaled that more similar rate hikes are on the table at coming meetings as they try to catch up with inflation.
The Fed chairman Jerome Powell acknowledged that there could be some pain associated with reducing inflation and curbing demand, but pushed back against the notion of an imminent recession, identifying labor market and strong consumer spending as bright spots in the economy. He has warned that a soft landing is not certain.
It won't be easy to do and it will be challenging. No one here thinks it will be easy. Powell said there were pathways for us to get there, despite the fact that there are pathways for us to get there.