There’s a Silver Lining for the Middle Class in High Interest Rates

By Matt Peterson

Americans are starting to feel better about the economy, but it might be a while before they release their anger at the Federal Reserve and Chairman Jay Powell. His approval rating has fallen even farther than President Joe Biden’s, according to Gallup. The Fed is seen as presiding over a period of inflationary agony. Its interest-rate increases were intended to slow price gains across the economy, but in the process they’ve made important aspects of American life more expensive. Sen. Elizabeth Warren (D., Mass.) and other Democrats urged Powell to cut rates this week, citing the high cost of mortgages, among other issues…. Banking analyst Karen Petrou’s 2021 book, Engine of Inequality: The Fed and the Future of Wealth in America, described the Fed in unflattering terms. The prolonged period of low rates helped boost stock prices but left the return on bank accounts’ savings at zero or below in real terms. The Fed didn’t want that result, and Powell has denied that the Fed is responsible for inequality. But Petrou argued that its monetary policy left the middle class “hollowed out.” Now that we’re on the other side of high rates, I asked Petrou for an update on her analysis. Banks are all but tripping over each other trying to recruit savers into high-yield accounts that offer risk-free returns above 5%. If part of the problem with low rates was that average Americans couldn’t save, does this new era of higher rates have anything to recommend it? Her answer: maybe, but it’s too soon to judge. Above-zero rates “would definitely benefit wealth equality by virtue of allowing savings to offer real return,” Petrou said in an email. But there are big unknowns. First of all, those tempting yields haven’t trickled down to the average bank savings account. “Savings rates for small-balance accounts are still generally negative in real terms,” Petrou said. Second, there’s the not-so-small matter of those outsize price increases everyone hates. “[Lower-to-middle-income] and middle-class households will be better able to make ends meet as long as the Fed’s inflation fighting doesn’t soften the economy enough to force job and wage cuts,” she said.