Morgan Stanley raises recession odds for the next year as inflation surges

in the next 12 months to 27%, a stark increase from March, when they projected just a 5% chance of a downturn this year. The increased probability of a downturn comes amid concerns that the Federal Reserve will be unable to achieve the elusive "soft landing," the sweet spot between curbing consumer demand and cooling inflation without crushing economic growth, as it raises interest rates.

"The probability of a hard rather than soft landing in the next 12 months has jumped to 27%," Lisa Shalett, Morgan Stanley Wealth Management's chief investment officer, wrote in the note.Economic growth in the U.S. is already slowing.

The analysis comes amid growing fears on Wall Street that the Fed may drag the economy into a recession as it seeks to tame inflation, which remained elevated at 8.3% in April. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street firms forecasting a downturn in the next two years, along with former Fed Chairman Ben Bernanke. "It now appears that inflation is broadening out and has the potential to stay higher for longer," Shalett said in the note.

"It will be challenging, it won’t be easy. No one here thinks that it will be easy. Nonetheless, we think there are pathways ... for us to get there," Powell said during an interview last week with Marketplace.

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