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 families, high rates are taking their toll.
More Americans are falling behind on credit card and auto loan payments, even as many are taking on more debt than ever. Monthly interest expenses have skyrocketed since the Federal Reserve began raising interest rates two years ago. For families already burdened by high prices, declining savings and slowing wage growth, rising borrowing costs are moving them closer to the financial advantage.
“It’s crazy,” said Ora Dorsey, a 43-year-old Army veteran in Clarksville, Tennessee. “It makes it difficult to get out of debt. It seems like you are just paying the interest.”
Dorsey has been working for years to reduce the debt she accumulated when a series of health problems left her temporarily out of work. She now juggles three jobs to try to pay off thousands of dollars in credit card balances and other debts. She is making progress, but the high rates are not helping.
“How am I supposed to retire?” she asked. “I can’t save, have that emergency fund, because I’m trying to reduce the debt I have.”
Mrs. Dorsey is not likely to get relief anytime soon. Federal Reserve officials have indicated they expect to keep interest rates at their current level, the highest in decades, for months. And while officials still say they are likely to eventually cut rates, assuming inflation slows as expected, they could consider raising them further if prices start rising more rapidly again. The latest evidence will come Wednesday, when the Labor Department releases data showing whether inflation cooled in April or remained uncomfortably high for a fourth straight month.
The broader economy has shown unexpected resistance to high interest rates. Consumers have continued to spend on travel, restaurant dining and entertainment thanks to rising wages and debt levels that, despite their recent rise, remain manageable as a share of income for most people.
But the aggregate numbers obscure an underlying divide that is likely to widen as interest rates remain high. Wealthy households, and even many in the middle class, have been largely insulated from the effects of the Federal Reserve’s policies. Many took out long-term mortgages when rates were rock bottom in 2020 or earlier (if they don’t own their homes outright) and most have little or no variable rate debt. And they are benefiting from higher returns on their savings.
For poorer families, it is different. They are more likely to carry a balance on credit cards, which means they are more likely to experience high rates. About 56 percent of people earning less than $25,000 had a credit card balance in 2022, compared to 38 percent of those earning more than $100,000, according to Federal Reserve data. African Americans, like Dorsey, and Latinos are also more likely to have balances.
Recent economic research suggests that high borrowing costs may be one reason for Americans’ poor view of the state of the economy. In surveys, low-income households are particularly harsh about their financial well-being.
Barbara L. Martinez, a Chicago financial advisor who works at Heartland Alliance, a nonprofit group, said that for many of her low-income clients, debt is inescapable, especially as food prices and rents have plummeted. shot. They don’t have savings to cover unexpected expenses like car repairs or illnesses. And while high borrowing costs don’t necessarily cause your financial difficulties, they make dealing with debt much more difficult.
“You’re trying to get out of the ocean, but the waves keep pushing you back,” he said. “No matter how much you swim, you get tired.”
High interest rates are always harder on borrowers than savers. But more often than not, they also drive down the value of stocks, homes, and other assets. That means rate increases generally affect households across the income spectrum, although in different ways.
That’s not how things have developed lately. Stock prices fell when the Federal Reserve began raising rates, but have recovered and are near a record. Home prices have continued to rise in most of the country.
The result is a growing division. Federal Reserve data suggests the wealth of the top half fell after the Fed’s initial rate hike in 2022, but it is again setting records. For the bottom half, however, wealth remains below its level before the Federal Reserve began raising rates, after subtracting credit card and mortgage debt and other liabilities.
“Higher-income households are feeling very satisfied,” said Brian Rose, senior economist at UBS. “They’ve seen such a big increase in the value of their home and the value of their portfolios that they feel like they can keep spending.”
Airlines, hotels and other industries that largely serve higher-income consumers have generally reported strong profits lately. But mass-market brands such as McDonald’s and KFC have reported slower sales, with many citing weakness among low-income consumers as part of the reason.
The divergence puts Federal Reserve officials in an awkward position: Free spending by wealthy households means high interest rates have done little to curb consumer demand. But with few other tools to combat inflation, policymakers have no choice but to keep interest rates high, even if those policies hurt already struggling families.
Virginia Diaz thought she was on her way to a secure retirement when she moved to Florida from New York almost 20 years ago. But she used her savings and racked up credit card debt to help members of her family, including a niece with health problems. Now high prices and high interest rates are putting her retirement at risk.
“Every time I make a payment on my credit card, most of the money will pay interest, and that snowballs,” he said. “I’m at the end of my rope.”
Díaz, 74, said he has cut his expenses to a minimum — “If I want to buy a candle, I have to think about it,” he said — and the rest of his family is struggling, too. His 35-year-old nephew works full time in the insurance industry, but lives in an apartment in his garage because he can’t afford to buy a house, or even a car. A friend of her niece also lives with her and contributes to pay the bills.
Diaz practically begged Federal Reserve officials to lower interest rates.
“I know they mean well, but it’s not working,” he said. “Take it down, for the love of God, so that people can live. Give us half a chance to give ourselves a decent standard of living.”
Many liberal economists agree, arguing that inflation has fallen enough that the Federal Reserve should begin cutting rates before it causes more severe economic damage.
“High interest rates really caused cracks in that recovery, and it’s the people on the margins of our economy who are hit first and hardest,” said Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive group. “They really serve as a barometer of what could happen to the rest of our economy.”
But Federal Reserve officials argue that controlling inflation is essential, in part because it also has a greater impact on the poor, who have little room in their budgets to accommodate higher prices.
“If you’re a person who lives paycheck to paycheck and suddenly all the things you buy, the fundamentals of life, go up in price, you’re in trouble right away,” said Jerome H. Powell, chairman of the Federal Reserve, in a press conference this month. “And so with those particular people in mind, what we’re doing is using our tools to reduce inflation.”
And while high interest rates have hurt many families, they have so far not caused the widespread job losses that many progressive critics predicted and that have historically been hardest on lower-wage workers. The unemployment rate remains low, even for black and Hispanic workers, who are often more likely to lose their jobs when the economy weakens. And wage growth in recent years has been strongest for the lowest-paid workers.
For most people, “the big question is whether you keep your job,” said C. Eugene Steuerle, a fellow at the Urban Institute who has studied how monetary policy affects inequality.
But current high rates could make it harder for many families to build wealth in the long term by making homeownership more difficult. They could also slow the construction of apartments and houses, which could eventually drive up rents even more.
The result: a generation of young adults who fear they won’t be able to afford to buy or rent.
Chris Nunn, 31, has racked up more than $6,000 in credit card debt, most of it for moving expenses tied to rent increases. His rent in Louisville, Kentucky, continues to rise, and he sees little hope of paying off the debt with what he earns driving for DoorDash while completing college.
“We don’t have the credit to be able to buy a house and we have a lot of debt, whether it’s student loans or credit card debt,” he said. “So we’re stuck.”