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

Apollo chief economist Torsten Slok warned that higher rates could curb homebuilding, lift rents, and feed inflation back into the Fed’s tightening cycle; shelter rose 3%, while owners’ equivalent rent accounts for roughly a quarter of CPI. August housing starts fell 2.6% from July to 1.275 million, and completions declined 11.9% month over month to 1.128 million. Markets assigned a 79.5% chance of an October rate hold after a September 25-basis-point increase to 3.75%–4%; UBS said it expects policymakers to wait until December before considering another hike.

Analysis

The market risk is less an imminent Fed hike than a supply-side inflation tail that limits how far the front end can rally. If financing costs and competition for skilled labor keep residential projects from reaching completion, rent disinflation may arrive later than a weak labor print implies. That supports a modest long-end inflation/term-premium premium even if near-term policy is on hold. The transmission is slow: starts and completions are noisy, while CPI shelter measures lag new-lease conditions.

The contrarian check is whether the supply story is being overstated. Higher rents require demand to absorb constrained inventory; weaker hiring, rising vacancies, or declining asking rents could break the loop before it materially changes CPI. Higher cap rates and financing costs also offset rent growth for apartment owners, so the sector is not a clean beneficiary. Homebuilders face the opposing combination of tighter affordability and potentially higher build costs; persistent labor scarcity would further pressure project economics.

Over 1–3 months, shelter detail, market-rent and vacancy data, Treasury term premium, and Fed communication should matter more than one starts release. Over 6–18 months, actual completions and construction labor availability determine whether supply tightness becomes durable inflation. CME Group is a potential activity beneficiary if rate uncertainty lifts hedging volumes, but the article provides no evidence of incremental volume or earnings impact; no directional CME trade is warranted.

Key Decisions for Investors

• Consider a small 2s10s Treasury curve steepener only if shelter inflation remains sticky while labor data keeps the Fed patient; the thesis is front-end restraint easing before long-end inflation risk does. Size modestly and reassess if rent measures roll over or the long end rallies on a clear growth shock.
• Do not chase apartment REITs solely on a rent-supply narrative: require evidence of improving leasing spreads and occupancy, and weigh those against cap-rate and refinancing pressure. A sustained rise in vacancies or falling new-lease rents falsifies the near-term rent-pricing thesis.
• Treat homebuilders as vulnerable to affordability and construction-cost pressure, but avoid a broad short absent company-level order cancellations, incentives, or margin guidance; those are the needed confirmation signals.
• Monitor CME Group trading-volume disclosures around rate uncertainty rather than taking a directional position. A volume increase without corresponding revenue conversion would weaken the proposed volatility-beneficiary angle.