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

Federal Reserve Chair Kevin Warsh's team is grappling with a "doom loop" of higher rates leading to higher rents, according to top economist Torsten Slok. The cycle sees higher interest rates causing builders to construct fewer homes and apartments, which in turn drives up rents. This leads to increased inflation and keeps interest rates elevated.

In September, the Federal Open Market Committee (FOMC) unanimously agreed to raise the base rate by 25 basis points to 3.75% to 4%, citing elevated inflation at 3.4% and a commitment to return to their 2% goal. Housing costs, particularly owners' equivalent rent, make up a significant portion of the CPI basket, and the recent uptick in rents poses a challenge for the Fed.

Construction costs are also on the rise as builders compete for skilled labor in the AI data center industry, and residential starts have been declining. The next likely action from the Fed may be holding rates steady, given the mixed signals from the job market and the ongoing strength in underlying economic fundamentals.