High Interest Rates Are Hitting Poorer Americans the Hardest
The economy as a whole has proved resilient amid the highest rates in decades. But beneath the surface, many low- and moderate-income families are struggling.
By Ben Casselman and Jeanna Smialek, The New York Times, May 14, 2024
…
…For millions of low- and moderate-income families, high rates are taking a toll.
More Americans are falling behind on payments on credit card and auto loans, even as many are taking on more debt than ever before. Monthly interest expenses have soared since the Federal Reserve began raising interest rates two years ago. For families already strained by high prices, dwindling savings and slowing wage growth, increased borrowing costs are pushing them closer to the financial edge…
Aggregate figures obscure an underlying divide that is likely to widen the longer interest rates remain high. Affluent households, and even many in the middle class, have largely been insulated from the effects of the Fed’s policies. Many took out long-term mortgages when rates were at rock bottom in 2020 or earlier — if they don’t own their homes outright — and most have little if any variable-rate debt. And they are benefiting from higher returns on their savings.
For poorer families, it is different. They are likelier to carry a balance on credit cards, meaning they’re more likely to feel high rates…
The unemployment rate remains low, including for Black and Hispanic workers, who are often more prone to lose their jobs when the economy weakens. And wage growth over the past several years has been strongest for lower-paid workers…[end quote]
The impact on the Macro economy will depend upon whether the total spending of all sectors holds up. So far so good. But households that are burdened with debt will gradually have to cut back their spending. That’s the whole point of the Fed’s program of rising interest rates – to slow inflation by reducing demand.
The Fed is aware that the poor are hurt by both inflation and high interest rates. Fed Chair Powell has spoken about the difficulty of living on a fixed income when inflation is rising. That’s why the Fed came down on the side of reducing inflation (which is part of its mandate) even if higher interest rates put a burden on the poor as well.
Wendy