Recent evidence shows that contractionary monetary policy raises U.S. housing rents even as house prices fall. I argue that this response reflects a shift in housing demand toward renting in segmented markets: tighter credit raises the cost of owning for constrained households, and because converting housing to rental use is costly, rental supply cannot expand enough to absorb the added demand, so rents rise. I quantify this mechanism in a New Keynesian model estimated on 1975-2019 U.S. data and disciplined jointly by the rent response to monetary policy and the slope of the tenure-supply curve. Tightening monetary policy in response to rising rents can reinforce the shift toward renting, and thus rental pressure. Excluding shelter from the target improves welfare, and a re-optimized rule with a stronger response to goods inflation improves it further. A stabilization objective that places most weight on aggregate inflation, relative to the output gap, selects a rule with nearly the same inflation and output-gap volatility. Additional responses to rents or house prices add little.

This paper studies how monetary policy affects rents. We provide comprehensive measures of rent inflation at a micro-geographic scale by constructing a new repeat-rent index. Using our index, we estimate the impulse responses of rents to monetary policy shocks across local housing markets. On average, contractionary monetary policy shifts household demand from the owner-occupied market to the rental market and increases rents. The average effect masks substantial heterogeneity across markets. The effect is greater in markets where household borrowing constraints are more binding, where landlords rely more heavily on debt financing, and where renter and owner markets are more segmented.