As the Fed increases interest rates to combat inflation, forecasters predict a higher likelihood of a recession in the near future.

The latest CNBC Fed Survey indicates that forecasters have revised their predictions for a recession and increased their projections for inflation due to the Federal Reserve's struggle with rising prices and uncertainty caused by Russia's invasion of Ukraine.

The likelihood of a recession in the U.S. has increased to 33% in the next 12 months, a 10% rise from the February survey. Meanwhile, the probability of a recession in Europe is at 50%.

The recent increase in commodity prices has sparked a debate among respondents about whether the Fed will raise interest rates more quickly to combat inflation or less quickly to preserve economic growth.

According to Guy LeBas, the increase in commodity prices is likely to slow down the rate of interest rate hikes more than the inflationary effect will speed it up.

According to Rob Morgan, senior vice president at Mosaic, the Fed is expected to raise interest rates six times by 0.25% in 2022. If the Consumer Price Index (CPI) reaches 9% in the March or April report, the Fed may be pressured to increase the rate hike by 0.5% in May.

According to 33 experts, including fund managers, strategists, and economists, the Federal Reserve is predicted to increase interest rates an average of 4.7 times this year, resulting in a funds rate of 1.4% by the end of the year and 2% by the end of 2023. Almost half of the respondents anticipate the central bank raising rates five to seven times this year.

The rate hike cycle is expected to end at a peak funds rate of 2.4%, which is close to the Fed's neutral rate. However, half of all respondents believe that the central bank may need to raise rates above neutral to control inflation.

The consumer price index is expected to peak at 8.5% in March, before gradually declining to end the year at 5.2%. This is a full percentage point higher than the February survey. In 2023, the CPI is forecast to rise at a tamer rate of 3.3%, which is still above the Fed's target.

"Peter Boockvar, chief investment officer of Bleakley Advisory Group, wrote that we may be close to the Fed raising rates at the same time there is a negative sign in front of GDP. He stated that this is an unfavorable situation, but until inflation decreases significantly, the Fed has no other option but to continue."

Recession not base case

Although a recession is viewed as a more likely outcome than in February, it is not the most probable scenario for most respondents. The average GDP forecast for this year decreased by 0.8 percentage point, but it remains slightly above the trend at 2.8%. The GDP forecast for 2023 also decreased by about half a point from the previous survey to 2.4%.

Nearly 90% of respondents have increased their 2022 inflation outlook due to Russia's invasion of Ukraine, adding an average of 0.8 percentage point to their forecasts. Additionally, 60% of respondents have decreased their GDP forecasts due to the conflict, with an average reduction of a half a point.

Despite a decline in growth outlooks and an increase in inflation forecasts, the outlook for stocks remains relatively positive. While the percentage of respondents who believe stocks are overvalued has decreased from 88% to 53%, this is still the least bearish outlook since the start of the Covid pandemic.

The CNBC Risk/Reward ratio improved to -9 from -14, indicating a lower chance of a 10% correction in the next six months. Meanwhile, the outlook for the stock market dropped to 4,431 this year, suggesting a potential 6% upside from the current level.