Kevin Warsh’s Fed has a rent problem: Higher rates could fuel a ‘doom loop’ in housing, top economist warns

Every aspect of the Federal Reserve’s job requires balance: Even its legal mandate of maximum employment versus inflation at 2% requires a trade-off between the two when setting the U.S. interest rate.

One conundrum the central bank—specifically, the rate-setting Federal Open Market Committee (FOMC)—must wrangle is the ripple effect that increasing the base rate will have on industries that ultimately trickle back to consumers.

Torsten Slok, chief economist for global asset management giant Apollo, pointed out to clients over the weekend that the Kevin Warsh-led Fed faces a “doom loop” of higher rates leading to higher rents.

He wrote: “When rates are high, builders build less, and when fewer homes and apartments get built, rents go up, which pushes inflation higher and keeps rates high.”

“Call this the ‘higher rates, higher rent doom loop.'”

In September, the FOMC unanimously agreed to raise the base rate by 25bps to 3.75% to 4%. The FOMC noted that inflation, at 3.4% as of the latest release, was elevated. It noted in its statement: “Today’s policy action will support a timelier return to the committee’s 2% goal. The committee will deliver price stability.”

While energy commodities were the biggest driver of the above-average reading (gas rising 28% on an unadjusted 12-month basis ending in August), shelter rose 3%. However, the impact of housing costs on all Americans is weightier than that of gasoline, according to the Bureau of Labor Statistics.

As Slok wrote: “With owners’ equivalent rent alone making up roughly a quarter of the CPI basket, this re-acceleration in rents is a problem for the Fed because it puts upward pressure on inflation driven by higher rates.”

Construction costs are already rising as house builders compete for skilled labor with companies building AI data centers, and residential starts data already shows signs of stuttering.

Privately owned housing starts in August were down 2.6% on the July estimate to 1,275,000, and down 1.2% on the August 2025 rate, according to the Census Bureau. Similarly, housing completions for August sat at 1,128,000—11.9% below the July estimate and 27.1% below the August 2025 rate.

The Fed’s next move

The Wall Street consensus is that the Fed will hold rates at its next meeting. A weaker September jobs report—showing just 29,000 jobs added—suggests the Fed may not want to further restrict economic activity for fear of curbing hiring.

However, analysts do, by and large, see interest rates trending upward overall—as evidenced by elevated yields on longer-dated U.S. Treasuries.

For the time being, interest rate traders see October as a hold: Per CME’s FedWatch barometer, at the time of writing, there is a 79.5% chance of a hold at the meeting, scheduled for a little over three weeks.

As Bank of America’s global economists Claudio Irigoyen and Antonio Gabriel told clients this morning: “The underlying fundamentals still point towards higher rates, with underlying inflation still stuck above 2.5%, job growth still above breakeven, and a solid growth outlook for both consumption and investment that is unlikely to slow unless the AI trade breaks.”

Likewise, UBS’s U.S. economist Andrew Dubinsky told clients: “Our Fed view remains that policymakers can wait until December before considering another rate increase. Recent comments from the NY Fed President Williams and Vice Chair Jefferson have suggested less urgency around additional tightening. Their communication, favorable inflation data, and more moderate job growth have contributed to Dec-2026 Fedfutures pricing falling by 13bps, leaving 25bps of tightening priced by year-end.”

This story was originally featured on Fortune.com