Get ready for interest rates to climb ‘a lot higher,’ says First Trust economist

The U.S. Federal Reserve will become “overly tight” with monetary policy either next year or in early 2024, but quantitative easing is the main contributor to inflation, financial advisors heard Thursday at a First Trust luncheon.

“When I look at where interest rates are going, I think they will go a lot higher in the coming years. I don’t know exactly when it’s going to happen,” said Strider Elass, senior economist with First Trust Advisors LP, during the First Trust ETF Institute in Toronto on June 16.

“We think it was obvious inflation would be an issue over the last couple of years, and we believe it will continue to be an issue until we get the money supply under control,” Elass told advisors during the First Trust ETF Institute, held at the Royal York Hotel.

“We believe that we probably won’t see a recession in the United States until late 2023 or early 2024 and that is when the Fed will become overly tight by raising rates too high,” Elass said.

The “good news,” about the Fed’s decision Wednesday to raise its benchmark rate by 75 basis points “is it seems like they are finally trying to take inflation seriously, although they still blame everything else besides [the quantitative easing] they decided to do back in March and April of 2020,” Elass said. “It’s pretty simple. What causes high inflation is too much money chasing too few goods.”

He acknowledged other commonly cited factors contributing to the recent spike in inflation, including the war in Ukraine and supply chain issues.

“But underlying what is really driving inflation higher is the massive increase” in the money supply, Elass said.

On June 10, the U.S. Labor Department reported American inflation is now 8.6%.