This year’s rising interest rates have not affected all Americans equally. For the wealthy, they merely slow financial growth. However, for those who do not have a major financial cushion, rising rates impose an unsustainable burden. For millions of working Americans who are not rich and have limited or no savings, elevated interest rates operate as a regressive tax! Interest rates now pose untenable burdens on Americans who have no choice but to try to survive amid the increased cost of living that rising rates impose. 

The sharp rise of rates has exceeded our nation’s capacity for absorbing such a jolt. After not raising rates at all during 2021, from March through September of this year, the Fed raised the Fed funds rate by 300 basis points (3 percent). While financial institutions and millionaires can absorb this rapid and sharp rise, most Americans cannot.  

The rate hikes raised the cost of capital, increasing family expenses in myriad ways: home purchasers are priced out of the market; homeowners with adjustable rate mortgages face sharp increases in their monthly payments; credit card debt spikes and card holders face usurious interest rates; college loans became more burdensome; car loans became more expensive; and consumers are forced to pay more for virtually everything, as prices for products and services that they purchase escalate commensurately due the increased operating costs of the companies providing them. 

Rate hikes reverberate for a while, causing disruptions and distortions as the economy adjusts to them. The effects of recent rate increases are still impacting industrial supply chains and consumer demand. When they fully take root, it will be obvious that the finances and living standards of lower income Americans have been disproportionately impaired. Although the Federal Reserve Board focuses on macroeconomic conditions and responses, it does not have the luxury of decision-making in a vacuum, unaware of the impact of its actions on those with less savings or who are living on the margin.  

For example, due to the racial wealth gap and implicit bias about credit risk, Black homeowners face interest rates that are higher than for their white counterparts regardless of income level, resulting in a higher financial burden. According to the U.S. Department of Commerce’s Minority Business Development Agency, Black-owned businesses pay 1.4 percent more in interest than white-owned businesses, and rate hikes exacerbate the challenge to remain competitive. As rate hikes are intended to slow economic growth, they cause job losses, which disproportionately burdens African American and Latino/Hispanic Americans, for whom unemployment rates are roughly double that of the white population even before new job losses. People of color also have, on average, much lower levels of savings and investments due to historical and institutionalized impediments to the accrual of generational wealth, causing much greater fiscal hardships when rates rise than for their white counterparts who can draw from their accrued savings and investments. 

Our nation has faced unprecedented fiscal challenges since the onset of the COVID-19 pandemic in early 2020. Those unique circumstances – the shutdown of the economy other than essential production and services, and the gradual resumption of industrial activity – posed daunting constraints to reengagement and revitalization of our nation’s full productive capacity. In 2020, it was necessary to resort to extraordinary measures in terms of interest rates, debt financing, and injection of liquidity by the Fed into our nation’s financial infrastructure. 

But the easing of financial policy and the maintenance of historically low interest rates continued unabated throughout 2021 amid incipient signals of rising and accelerating inflation, as well as robust growth in employment, manufacturing, and productivity. It is now obvious that a proactive approach by the Fed would have had a salutary effect in precipitating a soft landing for the economy to prevent an over-acceleration of inflation as a consequence of renewed productive capacity. 

I am now very concerned that the opportunity to preempt dramatic economic growth that was missed in 2021 could lead to an overcompensation in 2022 based on risk aversion in the opposite direction of fiscal policy. It appears that the governors of the Federal Reserve are collectively beholden to the notion that it is necessary to implement hyper-aggressive measures to forestall exposure to criticism for crafting an insufficient response to its prior error. While it is understandable on a human level that there is a strong inclination to avoid a recurrence of lassitude in response to unprecedented economic vicissitudes and fundamentals, an overreaction has perilous and potentially long-term consequences that cannot be countenanced in light of the severe deleterious impacts they impose on individuals’ lives and family finances nationwide. 

These concerns are shared by many of the most prestigious economists. On Oct. 9, 2022, when Mohamed El-Erian, chief economic advisor at Allianz, was asked about the Fed’s rate hikes, he said, “It’s made two big mistakes…One is mischaracterizing inflation as transitory…don’t worry about it. And then mistake number two, when they finally recognized that inflation was persistent and high…they didn’t act in a meaningful way. And as a result, we risk mistake number three, which is, by not easing the foot off the accelerator last year, they are slamming on the brakes this year, which would tip us into recession. So, yes, unfortunately, this will go down as a big policy error by the Federal Reserve.” On Oct. 10, El-Erian said, “Will they end up overdoing it? Most likely, yes. This is the most front-loaded interest rate hiking cycle we’ve had in decades.” 

On Oct. 18, 2022, KPMG chief economist Diane Swonk noted that mortgage rates have doubled, and said, “the housing market is absolutely in a recession and crashing. Rate hikes can amplify each other over time and they work with a lag. Much of the slowdown in consumer spending related to the crash in the housing market is still ahead of us. People have begun to slow down their purchases of big household appliances and furniture but not to the extent that we expect is in the pipeline. The question is: Can (the Fed) really contain that increase once it starts to rise…My concern is that they should slow the pace of rate hikes to assess what’s going on before they wait for all the effects. They sort of want to get to a higher rate than I think we need to get to…but there doesn’t need to be a rush now that we’re finally into what the Federal Reserve believes is restrictive territory…It seems like a good time to slow down the pace of increases.” 

While some increase in interest rates was necessary, the Fed must recognize the costs and consequences that have been imposed on American families as a result of the steep and rapid upward jolt in the rates this year. Since Federal Reserve chairs and governors often insist that the Fed’s decisions are data dependent and based on analysis of fundamental economic factors, the Fed’s calculations and determinations absolutely must include consideration of data on the ramifications that rates are having on the daily lives and diminished purchase power of middle income Americans, and especially on lower income Americans who have no means for adjusting their family budgets to accommodate the impact of the Fed’s rate decisions.  

Given that the worst is yet to come from the interest rate rises that have already been imposed, any further rise in rates would have truly debilitating, tragic consequences. We must insist that the Federal Reserve not impose this inevitability on our fellow Americans, as it could jeopardize many lives and livelihoods. 

Congresswoman Sheila Jackson Lee is a senior member of the Budget, Judiciary, and Homeland Security Committees of the U.S. House of Representatives 

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