The Federal Reserve’s recent policy decisions have intensified economic inequality in the US, and some policymakers acknowledge that addressing the issue is not straightforward.
Millions of Americans, particularly the wealthiest, benefited from the ultra-low interest rates during the pandemic when the Fed loosened monetary policy to support the economy. While borrowing costs have since surged, roughly 20% of homeowners still maintain mortgage rates below 3%, according to Fannie Mae. These households enjoy lower mortgage payments and have accumulated wealth simply by holding property.
Meanwhile, the US stock market continues its multi-year bull run, buoyed by ongoing investments in AI and technology, creating a pronounced wealth effect for investors. Low-income households, who are more likely to rent and less likely to hold equities, have largely missed out. Wage growth for these groups has also lagged behind that of the wealthiest Americans throughout 2025, according to data from the Federal Reserve Bank of Atlanta.
Affordability has become a key concern for many Americans, particularly lower-income households, and has entered the political spotlight, including remarks from President Donald Trump, who previously downplayed such concerns.
Fed officials acknowledge the K-shaped economy
Fed officials have admitted that they cannot easily correct the widening economic gap, often referred to as a “K-shaped economy.”
“When I’ve talked to retailers and CEOs who cater to the top third of the income distribution, everything’s great … it’s the lower half staring at this going, ‘What happened?’” Fed Governor Christopher Waller said at the Yale CEO Summit on December 16. Other policymakers, including Chair Jerome Powell, have similarly recognized the country’s growing economic divide.
“The best we can do is support the labor market, promote growth, and hope job security and wage gains begin to catch up,” Waller added.
Monetary policy’s role in diverging fortunes
While not intentional, monetary policy has contributed to the uneven economic outcomes between wealthy and lower-income Americans. In 2020, the Fed cut interest rates to near-zero to mitigate the pandemic’s economic shock, prioritizing maximum employment and price stability. Rates remained ultra-low until March 2022, allowing many homeowners to lock in exceptionally cheap mortgages.
Some analysts argue the Fed’s role in the K-shaped economy extends further back. “This really started in 2008 with the massive liquidity injections after the global financial crisis, which boosted stocks and housing,” said Oren Klachkin, financial economist at Nationwide. The resulting wealth gap persisted and was temporarily reduced after pandemic-era support.
Wage growth among lower-income Americans outpaced higher earners from 2020 to 2023, but by 2025 the trend had reversed. As of September, the 12-month moving average of median wage growth for the bottom quartile was 3.7%, compared with 4.4% for the top earners.
“Those at the bottom don’t have housing equity or stock portfolios to rely on, and most depend on wages to outpace inflation,” Klachkin said.
No easy fix for the Fed
The Fed’s main tool – its benchmark interest rate – affects the economy broadly but cannot target specific groups. Long-term rates, which affect mortgages and corporate borrowing, largely track Treasury yields, though both are influenced by Fed policy.
Over the past two years, the Fed has cut its lending rate by 1.75 points to support employment, hoping that easing rates will lift all households.
“Inflation must continue to be brought down; 2% is the target. But it matters how we get there,” San Francisco Fed President Mary Daly wrote following the Fed’s December rate decision. “We cannot allow the labor market to falter. Real wage gains come from long and durable expansions, and the current expansion is still relatively young.”
The Fed’s most effective strategy may be to maintain a stable labor market and let other forces support wage and employment growth.
“For lower-income households, the priority should be avoiding job losses rather than managing cumulative inflation,” said Alexander Guiliano, CIO at Resonate Wealth Partners. “Unemployment is largely out of their control, but they can manage inflation through financial choices.”
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