Black Americans feel disproportionate pain from high interest rates

The federal government’s efforts to stanch inflation are disproportionately impacting Black Americans. 

The Federal Reserve has hiked interest rates in the hopes of cooling off a red-hot economy, but its actions are hitting Black Americans — who have historically been squeezed out of home ownership and affordable loans — the hardest.

Fed interest rate hikes are meant to slow consumer and business spending by making debt more expensive, including mortgages. Mortgage rates rise as the Fed hikes its baseline interest rate higher, making monthly home payments more expensive for anyone seeking a new home or those who purchased one with an adjustable interest rate loan.

“African Americans have the lowest homeownership rates among the four major racial groups in the country,” Romie Tribble, professor of economics at Spelman College and secretary of the National Economic Association, told The Hill. 

Just 45.3 percent of Black households owned their homes during the second quarter of 2022, according to the Census Bureau, compared to 74.6 percent of white households, 61.1 percent of Asian households and 48.3 percent of Hispanic households.

“It’s now going to be more difficult for them to acquire and to also keep a home,” Tribble said.

Black Americans have long faced higher barriers to homeownership than their white counterparts, which is one of several forces behind a steep racial wealth gap. 

During the post-World War II economic boom, racist lending practices and bans on home sales to non-white families locked millions of minority families out of the housing market. 

While Congress passed laws intended to halt discriminatory lending practices during the 1970s, discrimination in the housing market still persists. And the racial wealth gap created in part by housing discrimination has left Black families with fewer resources to help achieve homeownership.

For many Black homeowners, interest rates are already often higher than their white counterparts regardless of income, according to a 2021 Harvard University study. This is, in part, because Black homeowners are seen as a bigger financial risk than white homeowners. 

Combined with the short supply of housing around the country, Tribble said, these concerns all exacerbate housing inequities. 

While higher interest rates are likely to take a steeper toll on Black Americans, the decades of near-zero rates meant to help low and middle-income households shore up their finances were not as helpful for them, experts say.

The Fed slashed its baseline interest rate range to near-zero levels in the wake of 2007-08 financial crisis to help keep money flowing through the economy. The central bank held rates near zero until 2015 and only hiked them gradually in the years that followed.

Ultra-low Fed interest rates in the wake of both the Great Recession and the COVID-19 recession helped fuel record-breaking home prices as households with means to keep up enjoyed low mortgage rates. Homeowners were also able to refinance their mortgages at lower rates, giving them more money to save up for the next home purchase.

But those super low rates did little to help Black Americans without homes and others on the margins of the housing market, all while pushing home prices even higher.

“The Fed through that period argued that ultra-low interest rates supported household wealth by virtue of allowing people with homes to reduce their cost of housing with refinancing and therefore improve their wealth position. But that turned out not to be anywhere near as true for low and moderate income people, particularly minorities,” said Karen Shaw Petrou, author of “Engine of Inequality: The Fed and the Future of Wealth in America.”

“We’ve now had 22 years … of policies that make it harder for lower and moderate income households, especially those of color, to be homeowners. “

But even for those who don’t have mortgage payments, high interest rates have led to the continued practice of banks offering predatory credit lines for Black Americans. 

Many African Americans don’t participate in the stock market, said Sharif Muhammad, CEO of Unlimited Financial Group Inc. and board member of the Association of African American Financial Advisor, meaning whatever cash they do have doesn’t have high growth prospects during a normal rate of inflation.

“But now when we’re in this hyperinflationary environment, purchase power is even more profound,” said Muhammad. 

But a lack of financial literacy leads to consumers spending more — and buying on credit more, too.

The problem is, Muhammad said, banks are capitalizing on that lack of knowledge by providing credit to unsuspecting African American communities who then “use it as an extension of their purchase power rather than seeing it as an actual borrowing of money.” 

And when the interest rates hit, Muhammad said, it becomes a “double whammy.”

“Your money is not growing because you’re keeping it in a savings account or cash and not properly investing it,” he explained, “and then you’re out there spending money using credit cards that are growing at almost usury level rates and compounding on a daily basis.”

The impact of these high interest rates seep outside the home, too, and into businesses. 

For many small business owners, the pandemic deeply affected their ability to stay afloat, and Black-owned businesses suffered the most. 

Now, even as the country moves into post-pandemic times, the struggle to recover persists. 

On average, Black-owned businesses already pay 1.4 percent more in interest than white-owned businesses, according to the U.S. Department of Commerce’s Minority Business Development Agency. 

With interest rate increases, the cost of borrowing goes up as well. Most of these small businesses operate with “working capital,” or capital accessible to banks, said Tribble. 

“For a small restaurant, rising interest rates in working capital means either ‘I’m going to have to cut back on employees or I’m going have to cut back on the hours that I’m open,’” said Tribble.

Which in turn exacerbates racial disparities in unemployment.

Black Americans face higher unemployment than whites at every level of education, according to the Associated Press. And despite the seemingly good job market, Muhammad points out the jobs numbers are a “lagging indicator” that won’t accurately reflect job retention until the next month.

Still, Tribble advises Black Americans to try to hold on to their jobs. 

“I know that prices are really difficult,” he said. “I know that people in the low income category are having to make hard choices. The limited money and limited funds that we have, we’ve just got to use them more efficiently than ever before.”

Muhammad also had advice: “get aggressive” paying down debt. He also added that now could be a good time to take advantage of investment opportunities and meeting with experts. 

For those who may be bracing for a potential layoff, he said, this will allow them to ensure they have a “rainy-day war chest.”

“Sit down with an advisor to really look at your tax situation and see if there’s anything in the provisions for the new tax laws that you’re not currently taking advantage of,” he advised.