Recent empirical evidence shows that contractionary monetary policy raises U.S. housing rents even as house prices fall. I show that this response reflects a shift in housing demand toward renting in segmented housing markets: tighter credit raises the cost of owning for constrained households, and costly reallocation of housing into rental use limits the supply response, so rents rise. I quantify this mechanism in a general equilibrium 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. Under a Taylor rule that responds to shelter-inclusive PCE inflation, the central bank reacts to a rent increase generated by its own tightening, raising the output cost of measured disinflation. Excluding shelter from the target lowers this cost and improves welfare, and responding more strongly to goods inflation raises welfare further. Additional responses to rents or house prices yield negligible gains.

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.