The Long-Term Impacts of Federal Reserve Interest Rate Hikes on Income Inequality

Abstract

This paper investigates the effects of Federal Reserve interest rate hikes on income and wealth inequality in the United States. We examine the short-term and long-term distributional consequences of monetary tightening, emphasizing the channels through which policy actions influence labor markets, asset values, credit access, and housing affordability. Higher interest rates slow investment and hiring, disproportionately affecting low-income workers in cyclical sectors and amplifying short-term income inequality. Similarly, rising borrowing costs and mortgage rates constrain homeownership and wealth accumulation for younger and minority households.

Conversely, rate hikes mitigate long-term inequality by curbing inflation, preserving real wages, and preventing destabilizing price surges that disproportionately burden low-income families. We analyze historical episodes, including the Volcker era, the 2015-2018 gradual tightening, and post-COVID hikes and compare cross-country evidence on the distributional impacts of monetary policy. Our findings highlight the dual role of interest rate policy: short-term exacerbation of inequality versus long-term protection of purchasing power. Policymakers should consider complementary fiscal measures, such as targeted subsidies, housing assistance, and wage support, to alleviate short-term inequities while achieving inflation stabilization. By integrating historical, empirical, and contemporary evidence, this study offers a comprehensive assessment of how monetary policy interacts with structural inequality in modern economies.