A Fed economist says the Fed is making inequality worse with its interest rate hikes

The Federal Reserve may be exacerbating inequality in its attempts to quash inflation with aggressive interest rate hikes, according to a new working paper from Fed economist Daniel Ringo. In an attempt to cool down inflation, the central bank raised rates seven times last year. And those hikes have made homeownership rates in lower-income communities drop.

Using mortgage application data, Ringo found that for a one-percentage-point rise in mortgage rates owing to Fed policy, home purchase loans to low- and moderate-income households drop by 7.5% almost “immediately.”

“Tighter policy…appears to prevent many lower-income families from buying homes,” he explained, adding that first-time homeownership is also “persistently lower” for one year following Fed rate hikes.

Over 250,000 low- and moderate-income households would be prevented from buying a home in the year following rate hikes, if Ringo’s estimates are correct.

“This finding of considerable persistence suggests that a one-time monetary policy decision has the potential to meaningfully affect the income composition of the stock of homeowners…for a protracted period,” he said.

The economist went on to emphasize that home price appreciation, along with the “forced-savings nature” of mortgage payments—homeowners’ consistent, repeated investment into an appreciating asset, effectively saving—can be “a powerful wealth-building tool” that many families miss out on when the Fed raises rates.

“Monetary policy affects not only the value of assets, but who is able to purchase those assets,” he wrote, noting that lower interest rates can allow lower-income households “to get their foot in the door of homeownership.”