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

Summary: Apollo chief economist Torsten Slok says the Kevin Warsh-led Federal Reserve faces a potential housing “doom loop” as higher interest rates could contribute to rising rents.

The Federal Reserve must balance its legal responsibilities to pursue maximum employment and 2% inflation when setting interest rates. That trade-off becomes more complicated when rate changes affect industries and eventually reach consumers.

Why rents are becoming a concern

Torsten Slok, chief economist at global asset manager Apollo, told clients over the weekend that the rate-setting Federal Open Market Committee faces a difficult housing-related problem. In his view, higher rates could lead to higher rents, creating what he described as a “doom loop.”

The warning highlights the broader effects of monetary policy beyond borrowing costs. A decision intended to address inflation can also have consequences for industries and households, making the Fed’s effort to balance its two mandates more difficult.

The policy challenge

Interest-rate decisions require the FOMC to weigh employment and inflation at the same time. Slok’s assessment suggests that housing costs may add another complication to that process, particularly if higher rates contribute to further rent increases.

The potential feedback between rates and rents underscores the risks facing the Warsh-led Fed as it manages policy. The available information does not indicate how policymakers will respond or whether the warned-about loop will develop.