How Much Economic ‘Collateral Damage’ Will Result from Rising Rates?

The Federal Reserve is doing all it can to avoid “collateral damage” from raising interest rates, but rate increases are a “brute-force tool” that can act as a “hammer” on the economy, says Fed Governor Christopher Waller.

“When you have to use a brute-force tool, sometimes there’s some collateral damage that happens,” Waller said Monday at a ‘Fed Listens’ event in Nashville that was also broadcast virtually. “We’re trying to do this in a way that there’s not much of it, but we can’t tailor policy.”

Fed officials raised rates by a quarter-point last month, to a target range of 0.25 percent to 0.5 percent, and signaled they expect to lift rates to 1.9 percent by the end of 2022 and 2.8 percent by the end of next year, according to their median forecast.

Since then, officials have said they are open to moving faster if needed to quell the hottest inflation in four decades, including by hiking by a half-point at their May 3 and 4 meeting.

Minutes of the Fed’s March meeting show that many of them had favored going that big last month, but they opted for a more cautious quarter-point hike in light of Russia’s invasion of Ukraine and were open to raising rates by a half-point at one or more meetings going forward.

Waller said the “tricky part” will be whether the Federal Open Market Committee (FOMC) can continue to raise rates without causing problems in areas such as employment and production. “With housing—can we cool off demand for housing without tanking the construction industry? Can we cool down the labor demand without causing employment to fall? That’s that’s the tricky road that we’re on,” Waller said.