The Diverse Impact of Interest Rates on Household Spending Across Race and Gender

In 2022-2023, The Federal Reserve aggressively increased interest rates to accommodate for the rapid inflation and booming economy following the COVID-19 pandemic.

The Fed’s interest rate hikes does not seem to affect everyone equally, with some households reducing their spending.

According to recent research from the Federal Reserve Bank of San Francisco, household responses to interest rate changes are not uniform across different demographics. Their article “The Unequal Effect of Interest Rates by Race, Gender” from August 1, 2022, explores how rising interest rates affect household spending, revealing notable differences across demographic groups. Aina Puig's economic letter focuses on the spending behaviors of households headed by white women, white men, Black women, and Black men, providing insights into the intricate dynamics of monetary policy changes.

According to the Federal Reserve Bank of San Francisco’s data, households led by white women reduced their spending on durable goods, such as computers, furniture, appliances, and cars, by about a quarter of a percentage point in the three years following a 1 percentage point increase in interest rates. This reduction is larger compared to households headed by white men or Black men. While households headed by Black women seemed to decrease when compared to Black male-led households, the data was not as clear. The report delves into possible reasons these disparities exist and how they impact spending behavior. For instance, the variations in spending patterns could stem from differences in income, wealth, and access to mortgage refinancing options depending on race and gender. Puig explains that income disparities across races and genders can also be affected by the number of income earners contributing to the household, the amount of unpaid family/child-care required, and employment options available. 

“In the sample, 61% of households headed by women have no spouse, while only 38% of households headed by men have no spouse. Black heads of household, especially women, are more likely to be single and support their family alone, while more white heads of household, especially men, have spouses that support the family both economically and in care work” (Puig). 

Financial security emerges as a critical factor shaping spending responses. Higher-income households with greater job stability may be less affected by interest rate changes, while those living paycheck-to-paycheck are more likely to adjust spending. This dynamic could exacerbate the existing inequalities. 

As interest rates rise, it becomes evident that the impact varies across different demographic groups. Households with lower income and less financial security may not be able to purchase a home, thus subject to rising rent costs, and the smaller margins between their income and expenses may require them to finance purchases at higher interest rates. Puig's research highlights the importance of considering race and gender dynamics when analyzing the effects of monetary policy on household spending, offering valuable insights for policymakers and economists alike.

If you're interested in understanding more about how interest rates can lead to economic inequality, read the full economic letter: https://www.frbsf.org/economic-research/publications/economic-letter/2022/august/unequal-effect-interest-rates-by-race-and-gender/

To read more about the progression of Federal interest rates in the past few years and how they affect the economy read: https://www.cnn.com/cnn-underscored/money/federal-funds-rate-history