The Federal Reserve’s policy decisions in recent years have exacerbated economic inequality in the United States, and some of the Central Bank’s policymakers say it’s not a problem they can easily solve.
Millions of Americans, especially the richest, have taken advantage of ultra-low interest rates during the pandemic as the Fed eased monetary policy to boost the economy.
Borrowing costs are now well above pandemic-era levels, but about 20% of homeowners still have a mortgage rate below 3%, according to Fannie Mae.
Not only do these families have lower mortgage payments, they have also built up equity simply by owning a home.
Meanwhile, the US stock market is about to complete another year of solid gains, marking a three-year bull run.
Low-income families, who are less likely to invest in stocks and more likely to be renters, have lost so-called wealth effects over the past five years. Their wage growth also lagged that of the richest households through 2025, according to the Atlanta Federal Reserve.
Affordability has become a key concern for many Americans, according to numerous surveys and surveys, especially for those with lower incomes.
It has also suddenly become a top priority for politicians, including President Donald Trump, who downplayed these concerns in his recent address to the nation.
Fed officials, who are among those responsible for managing the U.S. economy, have admitted they cannot easily deal with what economists call a “K-shaped economy.”
“When I talk to retailers and CEOs who serve the wealthiest third of the population, everything is great […] It’s the poorer half of the population who are looking at this and wondering, ‘What happened?’” Fed Governor Christopher Waller said Dec. 16 at the Yale CEO Summit.
Other Fed members, including Chairman Jerome Powell, have acknowledged rising economic inequality in the United States this year.
“The best thing we can do is try to rebuild the job market, grow the economy better, and hopefully job security and wage increases will start to follow,” Waller said.
The role that monetary policy played
While monetary policy has played a role in the disparity in fortunes between the richest and poorest Americans, it is an unintended consequence.
In 2020, the Fed was justified in cutting interest rates to near zero to support an economy hit hard by the pandemic.
The Fed, whose mission, determined by Congress, is to seek maximum employment and price stability, was dealing with the closure of companies during the pandemic, which caused a significant increase in unemployment.
The Fed kept interest rates at ultra-low levels until March 2022, when it began aggressively raising them to combat inflation.
At that time, about a quarter of the approximately 85 million homeowners in the United States had already secured an ultra-low mortgage interest rate, and only a small fraction of them have waived that rate since then.
But the Fed may have played a role in the K-shaped economy much earlier.
“This is a phenomenon that really began in 2008, with the massive liquidity injections the Fed made in response to the global financial crisis, which drove up stock market and real estate values,” said Oren Klachkin, financial markets economist at Nationwide.
“Since then, we’ve seen this persistent gap between the haves and the have-nots, which has actually narrowed after the pandemic.”
In fact, wages for the poorest Americans grew rapidly from 2020 to 2023, according to data from the Atlanta Fed, far outpacing growth for the richest workers. At the time, employers were struggling to hire from a limited number of workers.
This year, the situation has changed. In September, the 12-month moving average of median wage growth for the bottom quarter of the U.S. household income distribution was 3.7%, compared with 4.4% among top earners.
“Those at the bottom of the pyramid don’t have the value of their real estate to help them. They don’t have stock portfolios to help them. And it’s harder for them to access lines of credit,” Klachkin said. “They mainly depend on their salaries to beat inflation.”
Not an easy solution for the Fed
The Fed’s main tool—its benchmark interest rates, which influence borrowing costs across the economy—is widely known to be an inaccurate instrument.
This means the Fed can’t help specific groups whenever it tries to boost or ease pressure on the labor market, which is what policymakers are currently doing. The Fed also does not control long-term interest rates, which tend to track yields on long-term U.S. Treasury bonds (although bond yields are influenced by the same economic data that the Fed considers when setting its monetary policy).
Over the past two years, the Fed has cut its benchmark interest rate by 1.75 percentage points in an effort to keep the job market buoyant. The expectation is that these rate cuts will act as a rising tide that benefits everyone.
“The Fed must continue to reduce inflation. Anything other than 2% is not an option. But how this is achieved is crucial,” Mary Daly, president of the San Francisco Fed, wrote in a social media post following the Fed’s decision in December to cut interest rates for the third consecutive meeting.
“That means we can’t let the job market falter. Real wage gains come from long, lasting expansions. And the current expansion is still relatively new.”
The Fed’s best strategy for reversing the economy’s K-shaped curve may be to simply stop the labor market from deteriorating and wait for other forces to boost employment and wage growth.
“For low-income families, the concern should be avoiding job losses rather than dealing with accumulating inflation,” said Alexander Guiliano, chief investment officer at Resonate Wealth Partners.
“Unemployment is not something they can necessarily control, but inflation is something they can try to manage through the choices they make,” he added.
