How much economic “collateral damage” will result from the rate hike?

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

“When you have to use a tool of brute force, sometimes there’s collateral damage that happens,” Waller said Monday at a “Fed Listens” event in Nashville that also streamed virtually. “We try to do this in a way that there aren’t many, but we can’t fit the policy.”

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

Since then, officials have said they stand ready to act more quickly if needed to rein in the highest inflation in four decades, including raising by half a point at their May 3-4 meeting.

Minutes from the Fed’s March meeting show many had preferred to go this far last month, but opted for a more cautious quarter-point hike in light of the invasion of the Ukraine by Russia and were open to raising rates half a point at a time. or more upcoming meetings.

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