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As the Federal Reserve remains determined to raise interest rates, the U.S. will probably enter a recession next year, advisors heard on Friday.

Despite no official signs of a recession in the U.S. just yet, there is more pain on the way, especially in housing and employment, said Brian Wesbury, chief economist with First Trust Advisors L.P., in a webinar.

The distortions of economic activity from lockdowns, massive deficit spending, and money printing are undeniable. However, as the money supply slows, which should help moderate inflation, the Fed continues to raise rates, which Wesbury said will be the leading cause of a recession next year.

He compares it to the global economy getting into a car accident, and emergency medical technicians providing morphine while the victims wait to be seen by a doctor and address the real problem. 

“Eventually, the morphine wears off,” Wesbury said. 

Monetary policy, for example, is going to have to stay tight in order to bring down inflation, and if it stays tight enough for long enough to achieve that goal, that is very likely to cause a recession, Wesbury added. “We’re just not there yet.”

However, he does expect a recession sometime in 2023, predicting the Fed will raise its key rate by 75 basis points in early November, followed by another 50-bps hike in mid-December.

This will result in slower growth and as a result, the market could price in a predicted drop in corporate earnings.

At the same time, Wesbury said inflation remains stubbornly high, and as a result, there is still more pain to be felt in the bond market. In terms of growth stocks, he said the market had already priced in the pandemic and a significant amount of deficit spending, but that’s starting to go away.

On the value side, Wesbury said sectors that often perform well amid high interest rates and high inflation, such as materials and energy, still provide a ton of opportunity. 

So look for rougher economic waters by the end of 2023, Wesbury said, adding the outlook will be much more positive in three to five years, if investors are willing to wait. 

“You are going to look back and say, ‘Yes, it hurt during that time, but I am glad I stuck around.’”