Torsten Slok, chief economist at global asset management giant Apollo, warned clients over the weekend that the Kevin Warsh–led Federal Reserve faces a "doom loop" in which higher interest rates drive up rents and keep inflation elevated.

"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," Slok wrote. "Call this the 'higher rates, higher rent doom loop.'"

The warning highlights the balancing act confronting the central bank—specifically the rate-setting Federal Open Market Committee (FOMC)—whose legal mandate of maximum employment and 2% inflation already requires tradeoffs when setting the U.S. interest rate. Every increase in the base rate ripples through industries and ultimately lands on consumers, whether through the cost of servicing mortgages, auto loans, and credit cards or through the rents at the heart of Slok's warning.

In September, the FOMC voted unanimously to raise the base rate by 25 basis points, to a range of 3.75% to 4%. Describing inflation—at 3.4% in the latest release—as elevated, the committee said in its statement: "Today's policy action will support a timelier return to the committee's 2% goal. The committee will deliver price stability."

Energy commodities were the biggest driver of the above-average reading, with gasoline rising 28% on an unadjusted 12-month basis ending in August, while shelter rose 3%. According to the Bureau of Labor Statistics, however, the impact of housing costs on all Americans is weightier than that of gasoline.

Owners' equivalent rent, the gauge Slok highlights, is the Bureau of Labor Statistics' estimate of what homeowners would pay to rent their own homes—an attempt to capture housing costs for the many American households that own rather than rent. "With owners' equivalent rent alone making up roughly a quarter of the CPI [consumer price index] basket, this reacceleration in rents is a problem for the Fed because it puts upward pressure on inflation driven by higher rates," Slok wrote.

Supply-side pressures are already building. Construction costs are rising as homebuilders compete for skilled labor with companies building AI data centers, and residential construction data shows early signs of stuttering. Privately owned housing starts in August fell 2.6% from the July estimate to 1,275,000, and were down 1.2% from the August 2025 pace, according to the Census Bureau. Housing completions for August came in at 1,128,000—11.9% below the July estimate and 27.1% below the August 2025 rate. The completions figure is the one to watch for the loop Slok describes, since finished units, not starts, are what add to the supply of homes and apartments available to renters.

The Fed's next move

Wall Street's consensus is that the Fed will hold rates steady at its next meeting. A weaker September jobs report—showing just 29,000 jobs added—suggests policymakers may be reluctant to further restrict economic activity for fear of curbing hiring.

The hold-versus-hike calculus sits squarely inside the bind Slok identifies: under his thesis, the tool the Fed uses to fight inflation—higher rates—also feeds one of the inflation pressures it is trying to contain. Even so, analysts broadly expect interest rates to trend upward overall, as evidenced by elevated yields on longer-dated U.S. Treasuries. For now, rate traders see October as a hold: per CME's FedWatch barometer, there was a 79.5% chance of a hold at the meeting scheduled for a little over three weeks from now at the time of writing.

Bank of America global economists Claudio Irigoyen and Antonio Gabriel told clients: "The underlying fundamentals still point towards higher rates, with underlying inflation still stuck above 2.5%, job growth still above breakeven, and a solid growth outlook for both consumption and investment that is unlikely to slow unless the AI trade breaks."

UBS U.S. economist Andrew Dubinsky offered a similar outlook: "Our Fed view remains that policymakers can wait until December before considering another rate increase. Recent comments from the N.Y. Fed President [John] Williams and Vice Chair [Philip] Jefferson have suggested less urgency around additional tightening. Their communication, favorable inflation data, and more moderate job growth have contributed to Dec. 2026 Fed futures pricing falling by 13 bps [basis points], leaving 25 bps of tightening priced by year-end."

This story was originally featured on Fortune.com.