Fed Economist Argues Recent Rate Hikes May Be Increasing Wealth Inequality Rather Than Reducing It

A new working paper from the Federal Reserve argues the central bank’s recent rate hikes may be increasing wealth inequality rather than reducing it.

What Happened: Federal Reserve Board Economist Daniel Ringo argued home purchases by low- and moderate-income households may be particularly sensitive to mortgage interest rates. These households’ budgets are tighter and more frequently they come up against binding payment-to-income ratio constraints in credit decisions. The story was first reported by Bloomberg.

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Detailing the effects of hiking interest rates, Ringo pointed out from his research that a one percentage point policy-induced increase in mortgage rates lowers the presence of low-income households in the population of home buyers by one percentage point immediately following the shock. In the case of low- and moderate-income households, the reduction is by two percentage points.

Effects: The wealth-building consequences of being denied or discouraged from taking out a home purchase loan are particularly acute for households that do not already own their home, Ringo explained. “The effect of a rate shock on home buyer composition might be expected to fade over time, as house prices respond and borrowers adjust by e.g. finding homes that fit their new budget. However, I find these adjustments are apparently a slow process,” he said.

Monetary policy affects not only the value of assets but who is able to purchase those assets, he explained. While low-wealth households may not experience an immediate appreciation of financial assets when the stance of monetary policy is expansionary, that stance can allow them to get their foot in the door of home ownership, Ringo explained.

“The forced-savings nature of amortizing mortgage payments and house price appreciation together can be a powerful wealth-building tool for these families over the decades. Tighter policy, on the other hand, appears to prevent many lower-income families from buying homes,” he concluded.

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