The Federal Reserve’s policy choices over the past several years have helped widen America’s economic divides—and some policymakers say that’s a consequence they don’t have a clear way to undo.
During the pandemic, the Fed slashed rates and kept borrowing costs exceptionally low to stabilize an economy hit by shutdowns and surging unemployment. Many households—especially wealthier ones—were positioned to benefit. Even now, with rates well above pandemic-era lows, roughly one in five homeowners still holds a mortgage rate under 3%, according to Fannie Mae. Those owners aren’t just paying less each month; they’ve also seen their net worth rise as home prices climbed.
At the same time, the stock market is approaching another year of strong gains, fueled in part by ongoing investment in artificial intelligence and extending a powerful multiyear bull run.
Lower-income households have captured far less of that upside. They are less likely to own stocks and more likely to rent, leaving them on the sidelines of the wealth effects that have lifted assets in recent years. Their wage gains also lagged those of higher earners across 2025, according to data from the Federal Reserve Bank of Atlanta.
With costs still high, affordability has become a defining concern in polls and surveys—particularly for lower-income Americans. It has also risen quickly on the political agenda, including for President Donald Trump, who played down those worries in a recent address.
Inside the Fed, officials have increasingly conceded that they can’t precisely target inequality with the tools they have—an issue economists often describe as a “K-shaped economy,” where different income groups experience fundamentally different recoveries.
“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 of the income distribution that is staring at this going, ‘What happened?’” Fed Governor Christopher Waller said on December 16 at the Yale CEO Summit. Fed Chair Jerome Powell and other officials have also pointed to widening inequality this year.
“The best thing we can do is try to get the labor market back on its feet, get the economy kind of growing better, and hopefully the job security and wage gains start catching up,” Waller said.
How monetary policy fed the divide
The Fed’s actions weren’t designed to enrich some groups at the expense of others. In 2020, cutting rates to near zero was a widely supported emergency response meant to prevent a deeper collapse and push the economy toward maximum employment—one of the central bank’s mandates from Congress, along with stable prices.
The Fed held rates at very low levels until March 2022, then began a rapid tightening cycle to fight inflation. By that point, a large share of America’s roughly 85 million homeowners had already locked in ultra-low mortgage rates. Only a small portion have given those up since.
Some economists argue the pattern goes back even further.
“This is a phenomenon that really started in 2008, with the massive liquidity injections that the Fed did in response to the global financial crisis, which raised stock market values and housing values,” said Oren Klachkin, a financial market economist at Nationwide. “Since then, we’ve seen this persistent gap between the haves and the have nots, which actually narrowed after the pandemic.”
For a time, the labor market helped reduce the gap. From 2020 through 2023, wages for lower-income workers rose rapidly, outpacing gains for higher earners as employers competed for scarce labor, according to Atlanta Fed data.
That momentum cooled in 2025. In September, the 12-month moving average of median wage growth for the bottom quarter of households was 3.7%, compared with 4.4% for the highest earners.
“Those at the bottom don’t have housing values to help them. They don’t have the stock portfolios to help them. And it’s harder for them to tap into potential lines of credit,” Klachkin said. “They mostly depend on their wages to outpace inflation.”
Why the Fed says this isn’t an easy problem to solve
Even when the Fed wants to support the labor market, its primary lever—short-term interest rates—works broadly across the economy rather than on specific groups. Officials also don’t directly set long-term rates, which tend to move with Treasury yields and market expectations, even if they’re influenced by the same economic data the Fed weighs in its decisions.
Over the past two years, the Fed has cut its benchmark rate by 1.75 percentage points in an effort to support the job market. The idea is that easier financial conditions can help sustain growth and hiring—and eventually lift wages—across the board.
“(The Fed) must continue to bring inflation down. Anything other than 2% is not an option. But it matters how you get there,” San Francisco Fed President Mary Daly wrote in a social media post after the Fed’s December decision to lower rates for the third straight meeting. “This means we cannot let the labor market falter. Real wage gains come from long and durable expansions. And the current expansion is still relatively young.”
In practice, that means the Fed’s most realistic path to easing a K-shaped economy may be indirect: keep the labor market from weakening sharply, and hope that other forces—from hiring trends to productivity and fiscal policy—do the rest.
“For lower-income households, the concern should be about avoiding job losses rather than dealing with more cumulative 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 in terms of the choices that they make,” he added.
