Apollo Warns of Fed Rent Inflation Feedback Loop

Wall Street economist Torsten Slok of Apollo Global Management has issued a warning about a potential "higher rates, higher rent doom loop" facing the Federal Reserve. He argues that elevated interest rates are discouraging homebuilders, which in turn reduces housing supply and drives up rents. This creates a feedback loop where higher rents contribute to inflation, which keeps interest rates elevated.

The warning comes days after the Federal Open Market Committee raised its benchmark rate to a range of 3.75% to 4%. With the Consumer Price Index (CPI) at 3.4%, above the Fed's 2% target, Chair Kevin Warsh faces the challenge of controlling inflation without stifling housing supply needed to ease it.

Data supports Slok's concern. Shelter costs rose 3% year-over-year, and owners' equivalent rent makes up about 25% of the CPI basket. Meanwhile, US housing starts fell 2.6% in August from July, and completions dropped 11.9% from the previous month, highlighting the supply-side squeeze builders face.

Industry experts like Michael Brenning of eLend note that rapid swings in Treasury yields are complicating loan pricing and affordability. Melissa Cohn, a 44-year industry veteran, acknowledges the difficulty in taming inflation without lowering rates. The near-term consensus on Wall Street suggests the Fed will hold rates steady, with a 76.2% probability of no change in October.