Fed Admits Its Policies Worsened America’s K-Shaped Economic Divide

The Fed’s tools lifted asset prices—but left millions behind. Can monetary policy fix a divide it helped create?

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2025 December 27 . 5:58 PM

1 min read

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Fed Admits Its Policies Worsened America’s K-Shaped Economic Divide

America’s economic divide has widened in recent years, with the wealthy benefiting from rising asset values while lower-income households face stagnant wages and affordability pressures. Federal Reserve officials have now acknowledged the so-called K-shaped economy—where some prosper and others struggle—raising questions about how monetary policy could address the gap.

During the pandemic, ultra-low interest rates helped millions of Americans, particularly the wealthy. Around 20% of homeowners still hold mortgages below 3%, locking in savings. Meanwhile, the stock market surged over three years, driven by AI investments, further boosting wealth for those with assets.

Yet lower-income households, less likely to own stocks or property, missed out on these gains. Many rely on wages, which rose sharply during the pandemic but have since slowed. Inflation, while a concern, can at least be managed through spending choices—unemployment remains a bigger threat.

The Fed’s main tool—interest rates—is broad and cannot target specific groups. Officials admit this may have unintentionally deepened inequality by lifting asset prices for the rich while wage growth for the poor lagged. Their current strategy focuses on preventing a labour market downturn, hoping other factors will eventually lift employment and wages for struggling households.

Affordability has become a pressing issue, especially for those on lower incomes. The Fed aims to bring inflation down to 2% without weakening the job market, but no clear consensus exists among economists on how to reverse the K-shaped trend.

The Fed recognises the growing economic divide but has limited tools to fix it directly. Its approach now centres on stabilising the labour market while waiting for broader economic forces to improve conditions for lower-income workers. For now, affordability and wage stagnation remain key challenges for millions of Americans.