High interest rates have not collapsed the financial system, caused a wave of bankruptcies, or triggered the recession that many economists feared.
But for millions of low- and middle-income families, the high tax rates are a huge burden.
More Americans are falling behind on credit card and auto payments, while many others are more in debt than ever before. Monthly interest payments have skyrocketed since the Federal Reserve began raising interest rates two years ago. For families already struggling with high prices, dwindling savings and slowing wage growth, the rising cost of borrowing has pushed them further into the financial quagmire.
“It's crazy,” said Orla Dorsey, 43, an Army veteran who lives in Clarksville, Tenn. “It's really hard to pay off the debt. I feel like I'm just paying interest.”
Dorsey has been trying for years to chip away at the debt he incurred when a series of health issues left him temporarily unemployed. He's now working three jobs to pay off thousands of dollars in credit card balances and other debt. He's making progress, but high interest rates aren't helping.
“How am I going to retire?” she asked. “I'm trying to pay off my debts, I have no savings, and I don't have a rainy day fund.”
Dorsey is unlikely to be bailed out anytime soon. Fed officials have signaled they expect to keep interest rates at their current levels, the highest in decades, for several months. Policymakers still say they're likely to eventually cut rates, assuming inflation slows as expected, but they could consider raising them further if price growth starts to accelerate again. The latest evidence will come on Wednesday, when the Labor Department releases data showing whether inflation slowed in April or remained uncomfortably high for a fourth straight month.
The overall economy has proven unexpectedly resilient to high interest rates. Consumers continue to spend on travel, dining out, and entertainment thanks to rising wages and debt levels, which have increased recently but remain a manageable portion of income for most people.
But aggregate figures obscure underlying disparities that could widen the longer interest rates remain elevated. Wealthy households, and even many in the middle class, have been largely spared the effects of the Fed's policies. Many took out long-term mortgages in 2020 or earlier when interest rates were at their lowest (unless they own their homes outright), and most have little or no variable-rate debt. And they've benefited from rising yields on savings.
The story is different for poor families: They're more likely to carry credit card balances, which means they're more likely to feel the high interest rates. About 56% of people making less than $25,000 a year carried a credit card balance in 2022, compared with 38% of those making more than $100,000, according to Federal Reserve data. Black and Latino people like Dorsey are also more likely to carry balances.
High borrowing costs may be contributing to Americans' pessimistic views of their financial situation, according to a recent economic survey, which found that lower-income households remain especially pessimistic about their financial situation.
Barbara L. Martinez, a Chicago financial counselor who works for the nonprofit Heartland Alliance, said debt is inevitable for many of her low-income clients since food prices and rent have risen. They don't have the savings to cover unexpected expenses like car repairs or illness. High borrowing costs aren't necessarily the cause of their financial difficulties, but they do make debt much harder to manage.
“Even when I try to get out of the water, the waves keep pushing me back,” she said. “No matter how much I swim, I end up exhausted.”
Higher interest rates are always harder on borrowers than on savers, but in most cases, they also depress the value of stocks, homes, and other assets, meaning rising interest rates typically affect households across income levels, although in different ways.
That hasn't been the case recently: Stocks fell when the Fed began raising interest rates but have since recovered and are near all-time highs, and home prices continue to rise in most of the country.
As a result, inequality is growing: The wealth of the top half of the wealthy fell after the Fed raised interest rates for the first time in 2022, but has since risen to a record high again, according to Fed data. Meanwhile, the wealth of the bottom half of the wealthy is still below where it was before the Fed started raising rates, even after deducting credit card, mortgage debt and other debt.
“High-income households are feeling very wealthy,” said Brian Rose, senior economist at UBS. “They've seen such strong increases in home and property values that they feel they can continue to spend.”
Airlines, hotels and other industries that cater to higher-income consumers have generally reported strong profits recently, but mass-market brands such as McDonald's and KFC have seen sales stagnate, with many citing weakness among lower-income consumers as one of the reasons.
That divergence puts Fed officials in a tricky position: Free spending by wealthy households means high interest rates do little to quell consumer demand. But with few other tools to curb inflation, policymakers have little choice but to keep rates high, even if such a policy hurts households that are already struggling.
When Virginia Diaz moved from New York to Florida nearly 20 years ago, she thought she'd be able to retire comfortably. But to support her family, including her niece who has health problems, she dipped into her savings and racked up credit card debt. Now, rising prices and high interest rates are putting her retirement at risk.
“Every time I pay off my credit card bill, most of the money goes to interest payments, and it just keeps adding up,” she said. “I'm at my limit.”
Diaz, 74, said she has cut back on spending to the bare minimum. “If I want to buy a candle, I have to think twice,” she said. Her family is also struggling. Her nephew, 35, works full time in the insurance industry but lives in an apartment in her garage because he can't afford a car, let alone a house. A friend of her niece's also lives with her and helps pay the bills.
Diaz essentially begged Fed officials to lower interest rates.
“I know they mean well, but it's not working,” she said. “Please, lower taxes so people can survive. Give us half a chance to have a decent standard of living.”
Many liberal economists agree, arguing that inflation has fallen enough that the Fed should start cutting interest rates before it causes more serious economic damage.
“High interest rates create cracks in the recovery and hit people on the margins of the economy first and hardest,” said Rakeen Mabdo, chief economist at the progressive group Groundwork Collaborative. “They are a harbinger of what's going to happen to the rest of the economy.”
But Fed officials say it's essential to keep inflation in check, in part because it disproportionately affects the poor, who have little room in their budgets to keep up with rising prices.
“If someone who is living paycheck to paycheck suddenly sees the prices of all the basic necessities of life rise, they're in trouble right away,” Fed Chairman Jerome H. Powell said at a news conference this month. “So it's with them specifically in mind that we're taking steps to keep inflation down.”
While high interest rates have affected many families, they have so far not caused the widespread job losses that many progressive critics predicted and that have historically hit low-wage workers hardest. Unemployment rates have remained low, including for black and Hispanic workers, who are more likely to lose jobs when the economy weakens. And wage gains over the past few years have been strongest for low-wage workers.
“For most people, the big issue is whether they can keep their job,” said C. Eugene Stuele, a research fellow at the Urban Institute who studies how monetary policy affects inequality.
However, current high interest rates could make homeownership more difficult and make it harder for many families to build wealth in the long term. They could also discourage apartment and house construction, leading to higher rents in the long term.
This results in a generation of young people feeling anxious about their ability to buy or rent a home.
Chris Nunn, 31, has more than $6,000 in credit card debt, most of it for moving costs caused by rent increases. With rents continuing to rise in his Louisville, Kentucky, home, he feels he has little hope of paying off the debt on the income he makes driving for DoorDash while working toward a college degree.
“We don't have the credit to buy a house, and we have a lot of debt — student loans, credit card debt,” he said. “So we're trapped.”