The price for chicken is displayed at a store in Rosemead, Calif., on June 28, 2022. (Frederic J. Brown / AFP via Getty Images)
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Fast-rising prices for gas, food and most everything else is hitting low-income households hardest.

But the Federal Reserve’s effort to rein in inflation with higher interest rates could hurt those same households.

Inflation affecting countries across the globe this year has been driven in part by a mismatch in supply and demand. Bottlenecks in supply chains caused by the COVID-19 pandemic plus other events, like the conflict in Ukraine, have interfered with the production of many goods. Demand is higher because many people, after so much time in pandemic lockdowns, have savings they’re eager to spend on things they couldn’t do over the past couple of years.

Fed interest rate hikes in March, May and June were aimed at the demand side of the issue. Higher interest rates make it harder to borrow money or get credit, which means people will have less money to spend.

But it also means firms will do less business and need fewer workers. Rising unemployment always disproportionately affects Black and Latino workers.

“There’s no way to move us out of the current situation without driving up unemployment,” said William Darity Jr., a Duke University professor who has long studied the racial wealth gap.

Raising interest rates won’t improve inflation overnight. In the best of scenarios, prices will remain high through the end of the year.

The Federal Reserve Board and others hope they acted soon enough for a so-called “soft landing,” where the negative impacts of higher interest rates will be minimal while still slowing inflation. Their median projections show only a small increase in unemployment over the next few years with the decision to increase interest rates.

“We see restoring price stability as absolutely essential for the country in coming years,” Federal Reserve Chairman Jerome Powell said at a press conference. “Without price stability the economy doesn’t work for anybody, really.”

While everyone has felt the sticker shock, inflation falls hardest on households — disproportionately Black and Latino — who must spend most of their income each month on essentials like food, housing and transportation.

“I mean, there’s no good decision when it comes to equity now,” said Karen Petrou, managing partner of Federal Financial Analytics and the author of “Engine of Inequality: The Fed and the Future of Wealth in America.” “That’s the tragedy of the situation.”

There is a risk with higher rates that a recession follows. And it’s no secret who gets the worst of a recession.

“Particularly for the folks at the lowest end of the income distribution, there’s no question they’re being heavily hammered by inflation,” Darity said. “So either they’re going to be hammered by inflation or they’re going to be harmed by a recession.”

The Fed’s role in inequality

With so many causes of economic inequality in the U.S., the role of America’s central bank in widening the gap between the country’s richest and poorest gets little attention.

But the Federal Reserve has made key decisions in every major economic crisis we’ve faced over the last century that worsened this problem, economists and economic historians say. That includes several actions during the Great Depression.

Today, the Federal Reserve has a mandate to pursue price stability, maximum employment and long-term moderate interest rates in the U.S. economy. The employment mandate has its roots in the civil rights movement.

Because Black workers have long experienced high unemployment rates, reaching full employment in the economy was viewed as essential for equity by civil rights leaders, including Coretta Scott King, who co-founded the National Committee for Full Employment in 1974 to pursue a federal jobs guarantee.

The committee’s goal: Anybody who wanted work should be able to find it — and if you couldn’t land a job in the private sector, the federal government would employ you. That didn’t happen, but in the late 1970s, legislators amended the Federal Reserve’s mandate to pursue maximum employment alongside price stability.

Just a few years later in the early 1980s, Federal Reserve Chairman Paul Volcker sacrificed that to reduce spiraling inflation.

Benjamin Dulchin, director of the Fed Up campaign at the Center for Popular Democracy, said the Fed’s policies were part of the reason that workers, especially Black workers, began experiencing wage stagnation during this time.

“They were keeping enough slack in the economy, so workers, especially low-wage workers, weren’t able to effectively ask for wage increase,” Dulchin said. “Unemployment is an attack on working people. Unemployment is racism, and unemployment is a policy choice of the Federal Reserve.”

For Petrou, author of a book about the Fed, the institution became a primary driver in inequality beginning with the 2008 financial crisis. The Fed changed the way it conducted monetary policy as a response to that crisis, opting to step in and lower rates when the stock market showed signs of “being a little too wobbly,” she said.

This protected the financial markets, assets overwhelmingly owned by the country’s wealthiest people, who are mostly white. The Fed did it again in 2020 at the onset of the pandemic.

This type of policy props up the value of these assets, preserving and growing the wealth of those who hold them. People who live paycheck-to-paycheck and simply put their extra funds in a savings account, meanwhile, are effectively losing money, Petrou said.

Two years ago, the Federal Reserve adopted a new framework that would tolerate higher inflation to allow for a hotter labor market with lower unemployment. This type of policy would permit even bigger employment gains among subgroups, like Black workers, according to research presented to the Federal Reserve Open Market Committee in 2020.

“Unemployment is an attack on working people. Unemployment is racism, and unemployment is a policy choice of the Federal Reserve.”

Benjamin Dulchin, the Center for Popular Democracy

But the inflation taking hold amid the pandemic prompted the Fed to change course.

In multiple recent public statements, Powell has emphasized how strong the labor market has been in recent years and pointed to improvements in wage gaps, particularly for Black and Latino workers. But he’s also pointed to the disproportionate hardship low-income households are facing with inflation and said that price stability is essential for a healthy labor market.

“In the last two, three years, you’ve had the benefits of this tight labor market going to people in the lower quartiles. … Income gaps were coming down, wage gaps,” Powell said at a May press conference. “So it’s a really great thing. We’d all love to get back to that place. But to get back to anything like that place, you need price stability.”

A line chart shows the spikes in inflation.
(Getty Images)

Fixing inflation could mean a recession

While there’s some agreement among advocates and experts about how monetary policy impacts inequality, there’s sharp debate on what a future with more equitable monetary policy could look like — or if it should even be used to help close the country’s racial wealth gap.

Paul Wachtel, professor emeritus at New York University Stern School of Business, recently co-wrote a paper examining this question. He and his co-authors found that lower interest rates would indeed increase Black income. But it wouldn’t increase it nearly as much as it would increase asset wealth held mostly by white people, so inequality would still worsen. 

Wringing inflation out of the economy needs to be the Federal Reserve’s priority in this moment, he said. If inflation can’t be controlled, he said, it’ll do far more damage than the increased unemployment that results from higher interest rates. But Wachtel said Congress should consider safety net measures for the households most impacted.

“Letting the inflation go on and allowing it to become more strongly embedded would be the wrong approach to take,” he said.

The question of the moment is whether the interest rate hikes have slowed down the economy enough to quell inflation, but not so much to lead to a recession. If the U.S. experiences a recession, it will undoubtedly hurt lower-income households more.

Petrou said she foresaw that inflation was going to get worse than the Fed predicted a year ago. Since the Fed didn’t start gradually hiking rates earlier, she thinks its leaders have no choice but to make larger increases now.

“The Fed only had a series of bad options, and the least bad among them was raising rates as quickly as it did,” she said. “Had it waited even longer, the risks would have been even greater. There’s nothing good about any of this from an economic equality perspective. The damage here is going to be profound.”

Petrou thinks the Federal Reserve needs better data in its analyses to capture the reality of wealth and income distribution among U.S. households. She also recommends “automatic stabilizers,” protective measures for lower- and moderate-income households that will instantly go into effect in an economic downturn. 

These measures include overdraft protections in banks and small-dollar loans to lower-income families from the government to get through an economic crisis.

Darity, the Duke University scholar, said he thinks the federal government should have a full-employment mandate that isn’t solely the Fed’s responsibility. He envisions something more along the lines of the federal job guarantee that Coretta Scott King had advocated for.

When the Fed decided to raise interest rates, Dulchin’s Fed Up campaign took to the steps of its building in Washington, D.C., to protest.

Dulchin acknowledges that we’re in complicated times — that inflation is more damaging to Black and Latino households and that the Fed faces enormous pressure to do something about it, especially since it can take action more swiftly than Congress can.

But he and the other protestors don’t want this to be a moment where the Federal Reserve reverts back to a status quo of accepting higher rates of Black and Latino unemployment. They also don’t want the Fed to react to inflation in a way that drives the country into a recession.

While the Fed’s median forecast shows unemployment rising only to 4.1% by 2024 with planned interest rate hikes, not everyone has faith in their projections.

Former Treasury Secretary Lawrence Summers recently said unemployment would have to go far higher to truly quell the inflation we’re experiencing.

Either way, unemployment rates for Black and Latino workers will be higher than total unemployment rates because they always are. That’s something Dulchin wants to make sure Fed leaders don’t lose sight of as they navigate today’s inflation.

“We’re going into a bumpy period,” Dulchin said. “The answers are probably going to be complex for a while. The picture, you know, it’s not a clear one. But this should not be a moment where they’re allowed to go backwards.”

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Maya Srikrishnan is a veteran California-based journalist who joined the Center for Public Integrity...