Rate Cuts or Equity Gaps? How Fed Policy Risks Deepening Disparities

The Federal Reserve's prolonged high-rate stance, championed by policymakers like Governor Christopher Waller, is clashing with Senator Sherrod Brown's warnings of a deepening wealth divide. While Waller advocates for gradual easing contingent on inflation data, Brown argues that delayed rate cuts risk stifling homeownership and small business growth—sectors critical to economic equity. This policy misalignment creates a volatile backdrop for investors, who must position for the eventual Fed pivot while navigating systemic inequities.

The Equity Divide: Brown's Case Against High Rates

Senator Brown's arguments center on the disproportionate harm high interest rates inflict on marginalized communities. Take homeownership: mortgage rates have surged to 7.5%, nearly doubling since 2020, pricing out first-time buyers and exacerbating racial wealth gaps.

. For Black households, the homeownership gap has widened to 29 percentage points—the widest in a decade—as higher borrowing costs reduce eligibility. Meanwhile, corporate investors snap up affordable housing, displacing families and concentrating wealth in institutional hands.

Small businesses face a parallel crisis. With loan rates averaging 9.3%, 90% of small firms deem expansion “unfeasible,” per the National Federation of Independent Businesses. This stagnation hurts employment and wage growth, further squeezing households already battling inflation. Brown's critique extends to the root cause of inflation itself: corporate profit-driven price hikes, not demand. Over half of recent inflation stems from rising profit margins, as companies like Amazon and Uber exploit algorithmic pricing to maximize revenue. . The Fed's focus on demand-side cooling, Brown argues, fails to address this structural issue.

Waller's Data-Driven Caution: A Missed Equity Signal?

Governor Waller's stance hinges on inflation metrics. Core PCE inflation has indeed moderated to 3.6%, with housing services softening—a trend he cites to justify gradual easing starting in 2025. . However, his reliance on “imputed prices” overlooks the human toll of high rates. For example, Waller's dismissal of nonmarket service inflation ignores the real-world strain on families paying rising rents or childcare costs. By prioritizing data over equity impacts, the Fed risks prolonging disparities.

Waller also underestimates the Fed's role in addressing corporate-driven inflation. His focus on “supply-demand imbalances” ignores the role of monopolistic practices, dynamic pricing algorithms, and reduced competition. These factors, not just demand, sustain high prices—a problem requiring antitrust enforcement, not just rate cuts.

The Misalignment: Why Delayed Cuts Are Risky

The policy divide creates a ticking clock for equity. Delaying rate cuts until inflation fully “drops out” of the data could mean another year of:- Homeownership exclusion: Each 1% rate increase reduces Black mortgage eligibility by 15%, per the Urban Institute.
- Small business attrition: Firms with <$5M revenue are 3x more likely to close during rate hikes, per the SBA.
- Wealth gap expansion: White households hold 10x the median wealth of Black households; housing-driven disparities will worsen without affordability relief.

Worse, the Fed's narrow focus on inflation ignores its own tools to address corporate overreach. For instance, higher rates could incentivize buybacks and M&A (as seen in 2023), further consolidating market power—a problem only structural reforms can solve.

Investment Implications: Position for the Fed Pivot

While the Fed may delay cuts until late 2025, investors can prepare for the eventual easing cycle. Key plays include:

1. Real Estate Equity Plays:
2. Mortgage REITs: Companies like AGNC Investment Corp. (AGNC) benefit from narrowing spreads as rates peak.
3. Affordable Housing Funds: Blackstone's BXMT targets communities priced out by high rates, with 8%+ yields.

4. Homebuilders: Lennar (LEN) and D.R. Horton (DHI) could rebound as affordability improves, though they face near-term inventory overhang.

5. Small-Cap Recovery:

6. Regional Banks: Institutions like First Republic (FRC) or Truist (TFC) stand to gain as loan demand revives.

7. Small-Cap ETFs: The iShares Russell 2000 Growth ETF (IWO) holds firms reliant on consumer spending, which should rebound once rates ease.

8. Equity-Sensitive Sectors:

9. Consumer Discretionary: Home Depot (HD) and Lowe's (LOW) could see a rebound in home improvement spending as mortgage affordability improves.

The Bottom Line

The Fed's delayed easing risks embedding wealth gaps by sidelining homeowners and small businesses. While Waller's data-driven approach is prudent, it overlooks the human cost of prolonged high rates. Investors should pivot to real estate and small-cap equities now, anticipating the eventual Fed pivot. As Brown's warnings underscore, the path to equity isn't just about interest rates—it's about addressing the corporate profit machine driving inflation. Until that happens, the Fed's caution may do more harm than good.

Investor Action:
- Buy: AGNC, BXMT, LEN, IWO
- Watch: Core PCE inflation (July 2025), Fed policy meeting minutes (September 2025)
- Avoid: Overleveraged small businesses without pricing power.

The equity stakes in this Fed debate are high. Position wisely.