High interest rates have not collapsed the financial system, triggered a wave of bankruptcies, or caused the recession that many economists feared.
But for millions of low- and moderate-income households, high interest rates are taking a toll.
Even though more Americans are carrying more debt than ever before, more people are falling behind on their credit card and car loan payments. Monthly interest payments have skyrocketed since the Federal Reserve began raising interest rates two years ago. Higher borrowing costs are pushing households already under pressure from higher prices, lower savings and slower wage growth to the limit.
“It's crazy,” said Ola Dorsey, 43, an Army veteran from Clarksville, Tennessee. It looks like you're only paying interest. ”
Dorsey has worked for years to gradually pay off the debts he incurred when he was temporarily unemployed due to a series of health problems. Currently, she is juggling her three jobs and trying to pay off thousands of dollars in credit card balances and other debts. She's making progress, but her high rate doesn't help.
“How should I retire?” she asked. “I'm trying to pay off my debts, so I can't save money and have no funds for emergencies.”
It doesn't look like Mr. Dorsey will be saved any time soon. Fed officials said they expect to keep interest rates at their current levels, the highest in decades, for several months. Policymakers also still say they are likely to cut rates eventually, assuming inflation slows as expected, but could consider further hikes if prices start to rise again at an accelerated pace. There is sex. The latest evidence comes on Wednesday, when the Labor Department is scheduled to release data showing whether inflation slowed in April or remained uncomfortably high for a fourth consecutive month.
The overall economy turned out to be unexpectedly resilient to high interest rates. Rising wages and debt levels mean consumers continue to spend on travel, restaurant dining, and entertainment, which, despite recent increases, remains a manageable share of most people's incomes. It is at a high level.
But the overall numbers obscure fundamental disparities that can widen the longer interest rates remain high. Wealthy households, and even many middle class members, are largely insulated from the effects of Fed policy. Many people took out long-term mortgages (if they didn't own their home outright) when interest rates were rock-bottom before 2020, and have very little variable-rate debt. And they benefit from higher returns on their savings.
It's different for poor families. They are more likely to carry balances on their credit cards, so they are more likely to see higher rates. About 56% of people with incomes under $25,000 had credit card balances in 2022, compared with 38% of people with incomes of $100,000 or more, according to Federal Reserve data. Black Americans and Latinos like Dorsey are also more likely to carry balances.
Recent economic research suggests that high borrowing costs may be one reason for Americans' bleak view of the economy. Research shows that low-income households remain particularly pessimistic about their financial well-being.
Barbara L. Martinez, a Chicago financial counselor who works for the nonprofit Heartland Alliance, said debt is inevitable for many of her low-income clients, especially as food prices and rents soar. Ta. You don't have savings to cover unexpected expenses like car repairs or illness. And while high borrowing costs don't necessarily cause financial hardship, they make debt more difficult to deal with.
“You're trying to get out of the water, but the waves are pushing you back,” she says. “No matter how much I swim, I get tired.”
High interest rates are always harder on borrowers than savers. But in most cases, it also pushes down the value of stocks, homes, and other assets. In other words, interest rate increases typically affect households across the income spectrum, although in different ways.
Not so these days. Stock prices fell when the Fed started raising interest rates, but have since recovered to near-record levels. Housing prices continue to rise in most regions of the country.
As a result, inequality widens. According to Fed data, wealth among the top half declined after the Fed's first interest rate hike in 2022, but is once again setting records. But the bottom half's wealth remains below where it was before the Fed started raising interest rates, even after subtracting credit card, mortgage and other debt.
“High-income households feel very flush,'' said Brian Rose, senior economist at UBS. “They have seen their home values and portfolio values increase significantly and feel safe to continue spending.”
Airlines, hotels and other industries that primarily cater to high-income earners have generally reported strong profits recently. However, mass-market brands such as McDonald's and KFC have reported weak sales, with many citing weakness among lower-income groups as part of the reason.
This disconnect puts Fed officials in an uncomfortable position. The free spending of wealthy households means that high interest rates do little to dampen consumer demand. But with few other tools to fight inflation, policymakers have little choice but to keep interest rates high, even if doing so hurts already struggling household budgets.
When Virginia Diaz moved to Florida from New York nearly 20 years ago, she thought she was on track to secure retirement. However, she drained her savings and took on credit card debt to help her family, including her niece with health issues. Now, her retirement is in jeopardy due to high prices and interest rates.
“Every time you pay off your credit card, most of your money ends up in interest, and it snowballs,” she says. “I'm already at my limit.”
Mr. Diaz, 74, has cut his spending to the bare minimum, saying, “If you want to buy candles, you have to think about it.” And the rest of her family is also struggling. Her nephew, 35, works full time in the insurance industry but lives in an apartment in his garage because he can't afford a house or even a car. Her niece's friend also lives with her and helps pay for her living expenses little by little.
Mr. Diaz effectively begged Fed officials to lower interest rates.
“I know they mean well, but it's not working,” she says. “For God's sake, lower it so people can live. Give us half a chance to have a decent standard of living.”
Many liberal economists agree, arguing that inflation has fallen enough that the Fed should start cutting rates before it causes more serious economic damage.
“High interest rates have really forced cracks in the economic recovery, and those on the margins of the economy are the first to be hit and the hardest hit,” said Rakeen Mahboud, chief economist at the progressive group Groundwork Collaborative. ” he said. “They really serve as a foreshadowing of what’s going to happen to the rest of our economy.”
But Fed officials say it is essential to rein in inflation, in part because the impact is greater on the poor, who have little budgetary space to keep up with rising prices.
Federal Reserve Chairman Jerome H. Powell said, “If you're living paycheck to paycheck and all of the things you buy on the basis of your life suddenly go up in price, you're going to find yourself in a bind very quickly.'' This month's press conference. “So what we're doing, especially with these people in mind, is we're using tools to control inflation.”
And while high interest rates are impacting many households, so far many progressive critics have predicted, and historically, they have been the hardest on low-wage workers. Not causing job losses. Unemployment remains low, including among black and Hispanic workers. They are often more likely to lose their jobs when the economy worsens. And over the past few years, wage growth has been greatest among low-wage workers.
For most people, “the big question is whether they can keep their jobs,” said C. Eugene Stuell, a researcher at the Urban Institute who studies how monetary policy affects inequality. says.
But today's high interest rates can make homeownership more difficult and make it harder for many families to build wealth in the long term. It could also curtail the construction of apartments and homes, which could cause rents to rise further over time.
The result is a generation of young people who are afraid of not being able to buy or rent.
Chris Nunn, 31, had more than $6,000 in credit card debt, most of it for moving costs due to a rent increase. Rents continue to rise in Louisville, Kentucky, and there's little hope that the income from driving for DoorDash while earning a college degree will pay off the debt.
“We don't have enough credit to buy a house, and we have a lot of debt, including student loans and credit card debt,” he says. “That's why we're trapped.”
