The Federal Reserve's recent policy decisions have exacerbated economic inequality in the United States, and some Fed policymakers admit this is not a problem they can easily solve.
The asset appreciation feast has left many as bystanders. During the pandemic, the Fed eased monetary policy to stimulate the economy, enabling millions of Americans, particularly the wealthiest, to capitalize on the ultra-low interest rate environment. Although borrowing costs are now significantly higher than during the pandemic, data shows approximately 20% of homeowners still hold mortgages with interest rates below 3%. These households not only benefit from lower mortgage payments but also continue to accumulate wealth through property ownership.
Lower-income families, who are less likely to invest in the stock market and more likely to rent, have missed out on this wealth effect over the past five years. According to data from the Atlanta Fed, throughout 2025, wage growth for these households has also persistently lagged behind that of the wealthiest tier.
Social pressures are increasingly influencing political agendas. Multiple public opinion polls indicate that housing and overall affordability have become core concerns for many Americans, especially those with lower incomes. This issue has suddenly become a priority for politicians, including President Trump, although he downplayed these concerns in a recent national address.
As stewards of the U.S. economy, Fed officials have acknowledged the difficulty in addressing what economists term the "K-shaped economic" divergence. Fed Governor Christopher Waller conceded, "When I talk to retailers and CEOs serving the top third by income, they say things are great... but the bottom half are just looking at the situation and asking, what is going on?" Other Fed policymakers, including Chairman Jerome Powell, have also acknowledged the phenomenon of worsening U.S. economic inequality in 2025. Waller stated, "The best thing we can do is try to get the labor market back on track, push for higher-quality economic growth, hoping that job security and wage growth can gradually keep pace."
While monetary policy has played a role in widening the gap between the circumstances of America's richest and poorest, this was not the original intent of the policy. In 2020, the Fed slashed interest rates to near zero to support the pandemic-stricken economy, a decision justified at the time. The Fed, tasked by Congress with the dual mandate of achieving maximum employment and price stability, was confronting widespread business failures and soaring unemployment due to lockdowns.
The Fed maintained these ultra-low rates until March 2022, before embarking on an aggressive hiking cycle to combat inflation. By then, roughly a quarter of the nation's approximately 85 million homeowners had locked in ultra-low mortgage rates, and very few have since given up those low-cost loans. However, the Fed's impact on the K-shaped economy may have started earlier. Oren Klachkin, Financial Market Economist at Nationwide, noted, "This phenomenon really started in 2008, when the Fed's massive liquidity injections in response to the global financial crisis pushed up stock and real estate values. Since then, we've seen a persistent gap between the asset-holders and the have-nots—a gap that narrowed briefly after the pandemic."
In fact, according to Atlanta Fed data, from 2020 to 2023, wage growth for the poorest Americans was rapid, far outstripping that of the highest earners as employers competed to hire from a limited labor pool. But by 2025, the situation had reversed. September data showed the 12-month moving median wage growth for households in the bottom income quartile was 3.7%, compared to 4.4% for the highest income group. Klachkin pointed out, "The bottom cohort lacks the cushion of home values, doesn't have stock portfolios to help, and has less access to potential lines of credit. They primarily rely on wage growth outpacing inflation."
The Fed faces a dilemma, grappling with structural problems it can scarcely fix. The Fed's primary policy tool—influencing borrowing costs economy-wide through its benchmark rate—is widely considered a "blunt instrument." This means when the Fed tries to stimulate the labor market or ease pressure on it (as officials are currently doing), it cannot precisely target specific groups. The Fed also does not control long-term rates, which often follow long-term Treasury yields—though bond yields are also influenced by the economic data the Fed considers when setting policy. Over the past two years, the Fed has cut rates by a cumulative 1.75 percentage points to sustain labor market strength, hoping the rate cuts would produce a "rising tide lifts all boats" effect.
San Francisco Fed President Mary Daly emphasized, "The Fed must continue to lower inflation; there is no alternative to the 2% goal, but the path to get there is crucial. This means we cannot allow labor market weakness. Real wage growth comes from a long, sustainable economic expansion, and the current expansion cycle is still relatively young." To mitigate K-shaped divergence, the Fed's best strategy might simply be to prevent the labor market from deteriorating and hope other forces drive job and wage growth. Alessandro G. Giuliano, Chief Investment Officer at Fiduciary Wealth Partners, analyzed, "For lower-income families, the priority should be avoiding unemployment rather than fighting persistent inflation. They cannot control unemployment but can manage inflation pressures through their choices."
Structural inequality is undermining the dollar's long-term credibility and growth potential. The intensifying K-shaped economic divergence in the U.S. is not merely a social equity issue; it is deeply rooted in the nation's economic structure. Through the transmission mechanism of monetary policy, it exerts a complex and bearish influence on the long-term trajectory of the U.S. dollar index. The dollar's traditional strength rests on two pillars: U.S. economic resilience and the attractiveness of dollar-denominated assets. However, K-shaped divergence is eroding these pillars from within. The current K-shaped divergence in the U.S. economy extends far beyond a social fairness debate. By weakening the foundation of domestic demand, constraining monetary policy flexibility, and elevating socio-political risks, it undermines the underpinnings of dollar strength across multiple dimensions. The "internal injury" caused by this profound structural contradiction likely condemns the long-term trend of the dollar index to face persistent, endogenous downward pressure. During Asian trading hours on Monday, December 29, the dollar index traded in a narrow range near 98.00, not far above the low hit in early October (97.75).
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