The US Federal Reserve is facing a potential cycle in which higher interest rates reduce housebuilding, push up rents and make it harder to bring inflation back to its 2% target, according to Apollo chief economist Torsten Slok.
Slok said the Kevin Warsh-led central bank could become trapped in a “higher rates, higher rent doom loop”, as borrowing costs weigh on construction and a shortage of new homes and apartments puts upward pressure on rents.
“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,” he wrote in a note to clients.
The Federal Open Market Committee, the Fed’s rate-setting body, unanimously raised its benchmark rate by 25 basis points in September, taking it to a range of 3.75% to 4%.
It said inflation remained elevated at 3.4% in the latest release and that the policy move would support a faster return to its 2% goal.
Energy prices were the biggest contributor to the above-average inflation reading, with petrol rising 28% over the 12 months to August. But shelter costs rose 3%, and housing carries greater weight in the inflation measure than petrol, according to the Bureau of Labor Statistics.
Owners’ equivalent rent alone accounts for roughly a quarter of the consumer price index basket, making a renewed rise in rents a particular concern for policymakers.
“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,” Slok said.
The pressure on housebuilders is also being compounded by rising construction costs, as residential developers compete for skilled workers with companies building artificial-intelligence data centres.
US housing starts fell by 2.6% in August from July to an annual rate of 1.275 million, and were down 1.2% on the same month a year earlier, Census Bureau figures showed. Housing completions fell to 1.128 million, down 11.9% from July and 27.1% from August 2025.
Fed expected to hold rates at next meeting
Financial markets broadly expect the Fed to leave interest rates unchanged at its next meeting. A September jobs report showing only 29,000 new jobs may make policymakers cautious about further restricting economic activity and weakening hiring.
However, analysts continue to expect rates to trend higher overall, reflected in elevated yields on longer-dated US Treasury bonds.
Interest rate traders were pricing in a 79.5% chance of a hold at the meeting, which was due to take place in just over three weeks.
Bank of America economists Claudio Irigoyen and Antonio Gabriel said underlying conditions still pointed towards higher rates, citing inflation above 2.5%, job growth above the level needed to keep employment stable and solid consumer and investment growth.
They said that outlook was unlikely to weaken unless the artificial-intelligence trade faltered.
UBS economist Andrew Dubinsky said his view remained that policymakers could wait until December before considering another rate increase. He said recent comments from New York Fed president Williams and vice-chair Jefferson had indicated less urgency over further tightening.
Those comments, alongside favourable inflation data and more moderate job growth, had contributed to a 13-basis-point fall in December 2026 Fed futures pricing, leaving markets pricing in 25 basis points of tightening by the end of the year, he said.
