The Fed’s tools weren’t meant to address supply-side inflation

How high can interest rates go without tipping the US economy into a recession? That has been the debate roiling the economists deciding monetary policy in the Federal Reserve. So far, the Federal Reserve is committed to raising rates—perhaps seven times—this year to cool down prices.

Interest rate changes alone do not create more semiconductor chips or build more houses. But raising rates can slow down economic activity enough to ease inflationary pressure squeezing Americans’ pocketbooks. In February, inflation hit 7.9% on annual basis, according to the consumer price index, the highest point since 1982.

The decision facing Federal Reserve officials is how hard to tap the brakes. In its latest Summary of Economic Projections (pdf), one official suggested 12 rate hikes this year while another suggested five (3% in total hikes for the year versus 1.25%).

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