The Federal Reserve’s policy choices in recent years have worsened economic disparity in America, and some lawmakers at the central bank feel this is an issue they cannot readily resolve.
Millions of Americans, particularly the wealthiest, benefited from ultra-low interest rates during the pandemic, when the Fed eased monetary policy to bolster the economy. The expense of borrowing now considerably surpasses pandemic-era levels, yet, according to Fannie Mae data, roughly 20% of homeowners still possess a mortgage rate below 3%. These households not only enjoy lower mortgage payments but are also accumulating wealth simply through homeownership.
Meanwhile, the U.S. stock market is approaching another year of solid expansion, underpinned by continued AI investments, marking an impressive three-year bullish trend.
Less affluent households, which are less likely to hold stocks and more often rent, have missed out on so-called wealth effects over the past five years. Their wage increases have also lagged behind those of the richest during 2025, based on Federal Reserve Bank of Atlanta data.
Affordability has turned into a key concern for many Americans, per various surveys and polls, especially for low-income individuals. It has also suddenly become a major priority for politicians, including President Donald Trump, who downplayed these worries in his recent State of the Union address.
Fed officials, who are among the custodians of America’s economy, have conceded that they cannot easily manage what economists term a “K-shaped economy.”
“When I speak with retailers and CEOs who cater to the top third of the income distribution, everything is superb… it’s the lower half of the income distribution looking at it and thinking, ‘What happened?'” Fed Governor Christopher Waller stated this on December 16th at the Yale CEO Summit. Other Fed policymakers, including Chair Jerome Powell, have acknowledged the growing economic inequality in America this year.
“The best thing we can do is try to get the labor market back on its feet, improve economic growth, and hopefully, job security and wage gains start to catch up,” Waller commented.
The Role Played by Monetary Policy
While monetary policy played a part in the divergence between the wealthiest and poorest Americans, it was an unintended consequence.
In 2020, the Fed justifiably cut interest rates to near zero to support an economy hammered by the pandemic. The Fed, tasked by Congress with achieving maximum employment and stable prices, was facing business shutdowns during the pandemic, leading to surging unemployment.
The Fed kept rates at ultra-low levels until March 2022, when it began aggressively hiking rates to combat inflation. By then, about a quarter of the roughly 85 million American homeowners had already locked in ultra-low mortgage rates, and only a small fraction have relinquished those low rates since.
But the Fed may have played a hand in the K-shaped economy much earlier.
“This phenomenon really started in 2008 with the massive liquidity injections that the Fed carried out in response to the global financial crisis, which lifted stock market valuations and housing values,” said Oren Klachkin, an economist at Nationwide Financial Markets. “Since then, we’ve seen a persistent gulf between the haves and have-nots, which actually narrowed post-pandemic.”
Indeed, the wages of the poorest Americans grew swiftly from 2020 to 2023, per Atlanta Fed data, significantly outpacing the gains of the richest workers. During that time, employers were scrambling to hire from a limited pool of staff.
That is no longer the case this year. In September, the 12-month rolling median wage growth for the bottom income quartile of U.S. households was 3.7%, compared to 4.4% for the highest earners.
“Those at the bottom don’t have housing equity to assist them. They don’t have stock portfolios to help. And they find it harder to tap into potential lines of credit,” Klachkin noted. “They are mostly relying upon their wages to outpace inflation.”
Not a Simple Fix for the Fed
The Fed’s primary tool—its benchmark interest rates, which influence borrowing costs throughout the economy—is widely known as a blunt instrument.
This means it cannot favor specific groups when attempting to tighten or loosen labor market pressure, which officials are currently doing. The Fed also does not govern long-term interest rates, which tend to track the yields of long-duration U.S. Treasury bonds (though bond yields are influenced by the same economic data the Fed considers when setting policy).
Over the last two years, the Fed has reduced its key lending rate by 1.75 percentage points, attempting to keep the labor market afloat. The hope is that these rate cuts will be a rising tide that lifts all boats.
“(The Fed) must continue to bring inflation down. Anything over 2% is not desirable. But how you get there matters,” wrote San Francisco Fed President Mary Daly in a social media post following the Fed’s December decision to cut rates for the third consecutive meeting. “That means we cannot allow the labor market to falter. Real wage growth is achieved through long and steady expansions. And the current expansion is still relatively young.”
The Fed’s best strategy to reverse the K-shaped economy might be to simply prevent the labor market from worsening and hope that other factors stimulate employment and wage growth.
“For low-income households, the focus ought to be tied to preventing job losses, rather than fighting accumulated inflation,” stated Alexander Julián, Chief Investment Officer at Resonate Wealth Partners.
“Unemployment is not something they can necessarily steer, but inflation they can attempt to manage based on their decisions,” he added.
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