The Fed's K-Shaped Economy Problem Has No Easy Fix
Powell admits the wealth divide is 'clearly a thing' as the top 10% own 87% of stocks while the bottom 50% own 1.1%. Monetary policy can't solve this.
Jerome Powell said the quiet part out loud.
At his December 10 press conference, the Fed Chair acknowledged what economists and earnings calls have been signaling for months: the U.S. economy has split into two distinct trajectories. The top is thriving. The bottom is struggling. And the Fed can't fix it.
"We hear about this a lot," Powell said when asked about the so-called K-shaped economy. "If you listen to the earnings reports for consumer-facing companies that tend to deal with low- and moderate-income people, they'll all say that we're seeing people tightening their belts, changing products that they buy, buying less."
He added: "So as to how sustainable it is, I don't know."
Two Economies, One Country
The K-shaped recovery—where the wealthy move up while lower-income Americans move sideways or down—isn't new. But it's become impossible to ignore.
Federal Reserve data shows the wealthiest 10% of Americans own roughly 87% of the stock market. The bottom 50% own 1.1%. When the S&P 500 gains 18% in a year, that wealth flows almost entirely to those who already have it.
Housing tells a similar story. Home prices have risen faster than wages for over a decade, pushing homeownership further out of reach for first-time buyers while enriching existing owners. The median home price now exceeds $400,000 nationally—more than six times median household income.
Fed Governor Christopher Waller put it bluntly at the Yale CEO Summit last week: "When I've talked to retailers and CEOs who cater to the top third of the income distribution, everything's great. It's the lower half of the income distribution that is staring at this going, 'What happened?'"
The Data Behind the Divide
Third-quarter GDP grew at an annualized 4.3%—the fastest pace in two years. But that headline masks significant divergence.
Consumer spending, which drives roughly 70% of GDP, is increasingly concentrated among higher earners. Luxury goods, travel, and experiences are holding up. Dollar stores and discount retailers are reporting weaker traffic as their core customers pull back.
Unemployment has crept up to 4.6%, and Powell has warned that recent payroll data may be overstating job gains. The labor market isn't falling apart, but it's no longer the tailwind it was in 2022 and 2023.
Credit card delinquencies have risen to their highest levels since 2012. Auto loan defaults are climbing. These stress signals are concentrated among households earning under $50,000—the same cohort that never fully recovered from pandemic-era inflation.
Why the Fed Can't Solve This
The Federal Reserve has one primary tool: interest rates. Lowering them stimulates borrowing and spending. Raising them cools inflation. Neither mechanism directly addresses wealth concentration.
When the Fed cuts rates, asset prices tend to rise. Stocks rally. Homes appreciate. The wealthy—who own most of these assets—benefit disproportionately. The lower-income worker who rents and has no 401(k) sees little upside.
When the Fed raises rates, the math inverts. Higher borrowing costs hit those with variable-rate debt hardest: credit cards, adjustable mortgages, auto loans. Again, the pain concentrates at the bottom.
The Fed's San Francisco President Mary Daly acknowledged the dilemma after December's rate cut. The best the Fed can do, she suggested, is prevent the labor market from deteriorating further. Job losses would hurt lower-income workers most.
Inflation's Unequal Bite
The K-shape has an inflation dimension too.
Wealthy households spend a smaller share of income on essentials—food, gas, rent. When grocery prices rise 20%, it's an inconvenience, not a crisis. For a family earning $40,000, that same increase means trade-offs: skip the doctor's visit, delay the car repair, stretch the paycheck thinner.
Inflation has cooled from its 2022 peak, but prices haven't fallen. Eggs still cost more than they did three years ago. So does ground beef, electricity, and car insurance. The cumulative burden remains, even as the rate of increase slows.
This is what Powell means when he says the K-shaped economy's sustainability is uncertain. The top third can keep spending because their portfolios are up and their jobs are secure. The bottom half is running on fumes.
What Comes Next
The Fed lowered rates again in December, bringing the benchmark range to 3.50%-3.75%. The dot plot projects just one cut in 2026—a slower pace than markets hoped for.
That's probably the right call for inflation. Whether it's the right call for economic stability is a harder question.
Mark Zandi, chief economist at Moody's, has warned that "so many Americans are already living on the financial edge." A recession would hit this group hardest, potentially turning a K-shaped economy into something worse.
For now, the expansion continues. GDP is growing. The stock market is at record highs. Corporate earnings are beating expectations. By traditional metrics, the economy is healthy.
But traditional metrics don't capture what's happening below the surface. Two economies are running in parallel, connected by the same currency and interest rate but operating under different rules. The Fed sees the divide. It just can't bridge it.