The Fed has one interest rate. America has two economies

The Federal Reserve's recent interest rate hike has been framed as a sign of robust economic growth, but this perspective overlooks significant disparities within the U.S. economy. While policymakers tout expanding domestic spending, strong productivity, and capital investment, they overlook the deeply unequal distribution of wealth and purchasing power.

The top 20% of households now control about 60% of consumer spending, while the middle class has seen a 115% collapse in their wage-price margin, turning it negative. Despite record household wealth, driven largely by equity gains, the benefits are concentrated among the wealthiest 10%, who hold over 87% of equities. This highlights a stark contrast: while the economy appears resilient at the aggregate level, the resilience of individual households varies dramatically.

When the Fed raises rates, those with substantial assets may benefit, but for households operating on negative margins, the increase is a burden. This dichotomy is exemplified by the staggering $160 billion in installment financing provided by major providers last year, much of which is used to cover basic expenses like groceries, housing, and food for those with negative financial margins.

The problem extends beyond mere distributional issues; it poses a fundamental monetary policy challenge. Aggregate data can mask the divergent labor market realities and the potential economic capacity that remains untapped. Expanding the productive base is crucial, but suppressing demand through higher borrowing costs is counterproductive.

Instead, policymakers must focus on unlocking the $3.1 trillion economic opportunity represented by the underutilized human capacity in the U.S. By improving workforce participation and removing systemic friction, America can foster growth without triggering inflation, thereby restoring a viable middle-class margin that does not rely on high-interest installment financing for everyday living expenses.