Fed’s high interest rates hitting poor hardest

Stubborn inflation has kept benchmark level elevated, but brunt of decision being felt by middle, lower classes

High interest rates haven’t crashed the financial system, set off 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 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 edge.

“It’s crazy,” said Ora Dorsey, a 43-yearold Army veteran in Clarksville, Tenn.

“It does make it hard to get out of debt. It seems like you’re only paying the interest.”

Dorsey isn’t likely to get relief soon. Fed officials have indicated they expect to keep interest rates at their current level, the highest in decades, for months. And although policymakers still say they are likely to cut rates eventually, assuming inflation slows down as expected, they could consider raising them further if prices begin rising faster again. The latest evidence will come Wednesday, when the Labor Department releases data showing whether inflation cooled in April or remained uncomfortably hot for a fourth straight month.

The overall economy has proved unexpectedly resilient to high interest rates. Consumers have continued spending on travel, restaurant meals and entertainment thanks to rising wages and debt levels that, despite their recent increase, remain manageable as a share of income for most people.

Recent economic research suggests high borrowing costs may be one reason for Americans’ dim view of the state of the economy. In surveys, lower-income households remain particularly dour about their financial well-being.

But 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. According to Fed data, about 56% of people earning less than $25,000 carried a credit card balance in 2022, compared with 38% of those earning more than $100,000. Black Americans, like Dorsey, and Latinos are also more likely to carry balances.

High interest rates are always tougher on borrowers than on savers. But most of the time, they also push down the value of stocks, houses and other assets.

That isn’t how things have played out recently. Stock prices fell when the Fed began raising rates but have rebounded and are near a record. Home prices have continued rising in most of the country.

The result is a growing divide.