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Washington —

The Federal Reserve’s policy decisions in recent years have exacerbated economic inequality in America, and some of the central bank’s policymakers say it’s not a problem they can easily fix.

Millions of Americans, especially the richest, took advantage of the ultra-low interest rates during the pandemic, when the Fed loosened up monetary policy to shore up the economy. Borrowing costs are now well above pandemic-era levels, but about 20% of homeowners still have a mortgage rate below 3%, according to Fannie Mae. Not only do those households have lower mortgage payments, but they’ve also been accumulating wealth by simply owning a home.

Meanwhile, the US stock market is closing in on yet another year of solid gains, boosted by continued investments in AI, marking a stunning three-year bull market.

Low-income households, who are less likely to invest in stocks and are more likely to be renters, have missed out on those so-called wealth-effects in the past five years. The growth of their wages also trailed those of the wealthiest throughout 2025, according to the Federal Reserve Bank of Atlanta.

Affordability has emerged as a key concern for many Americans, according to various polls and surveys, especially for those with lower incomes. It’s also suddenly become a top priority for politicians, including President Donald Trump, who downplayed those concerns in his recent address to the nation.

Fed officials, who are among America’s stewards of the economy, have admitted they can’t easily address what economists refer to as the “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 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. Other Fed policymakers, including Chair Jerome Powell, have acknowledged America’s widening economic 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.

While monetary policy has played a role in the diverging fortunes between the wealthiest and poorest Americans, it’s an unintended consequence.

In 2020, the Fed was justified in slashing interest rates to near-zero to support an economy battered by the pandemic. The Fed, which is tasked by Congress to strive toward maximum employment and stable prices, was dealing with pandemic-era shutdowns of businesses that were causing unemployment to surge.

The Fed kept rates at ultra-low levels until March 2022, when it began to hike rates aggressively to combat inflation. By then, about a quarter of America’s roughly 85 million homeowners had locked in an ultra-low mortgage rate, and only a fraction of them have parted with their low rate since then.

But the Fed may have played a role in the K-shaped economy much earlier.

“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, 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.”

Indeed, the wages of the poorest Americans grew rapidly from 2020 through 2023, according to Atlanta Fed data, far outpacing the growth of the wealthiest workers. At the time, employers were scrambling to hire from a limited pool of workers.

That was no longer the case this year. In September, the 12-month moving average of median wage growth of the bottom quarter of US households on the income distribution was 3.7%, compared with the 4.4% among 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.”

The Fed’s main tool — its key interest rates, which influences borrowing costs across the economy — is widely known as a blunt instrument.

That means it can’t help specific groups whenever it’s trying to boost or ease pressure off the labor market, which is what officials are currently doing. The Fed also doesn’t control long-term interest rates, which tend to track the yields on longer-dated US Treasury notes (though bond yields are influenced by the same economic data that the Fed considers when setting policy.)

Over the past two years, the Fed has lowered its benchmark lending rate by 1.75 points in an effort to keep the labor market afloat. The hope is that those rate cuts will function as a rising tide that lifts all boats.

“(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.”

The Fed’s best strategy to undo the K-shaped economy may be to simply prevent the labor market from deteriorating, and hope other forces boost employment and wage growth.

“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.

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