Why Charles Plosser’s Retirement Might Mean Lower Mortgage Rates Next Year

Charles I. Plosser, president and chief executive officer of the Federal Reserve Bank of Philadelphia, today announced that he will retire, effective March 1, 2015 – Federal Reserve Bank of Philadelphia, September 25th, 2014.

That one short sentence, posted quietly last week on the Federal Reserve Bank of Philadelphia website, could have broad implications for mortgage rates next year.

Charles Plosser is perhaps the leading hawk at the Federal Reserve, long arguing that the central bank should start raising rates to avoid financial bubbles and keep inflation in check. His retirement could significantly ease pressure on the remaining committee members to begin hiking interest rates next year.

The Philly Fed chief has dissented at the past two Fed policy meetings, objecting to the committee’s pledge to keep rates near zero “for a considerable period.”

“We must acknowledge and thus prepare the markets for the fact that interest rates may begin to increase sooner than previously anticipated,” Plosser said in a speech earlier this month. With the announcement of his retirement, it’s suddenly clear the 66-year old Fed president won’t be around to push for tighter monetary policy much longer.

Normally, one Fed member’s retirement would not be enough to alter the path of interest rates, however Plosser’s annoucement comes just days after another well-known hawk, Dallas Fed president Richard Fisher, said he plans to retire by next spring.

It's a delicious irony: just as the Fed begins considering when to raise rates, the two chief advocates for rate hikes are leaving the scene.

“The retirement of Fisher and Plosser in 2015 could potentially shift the composition at the FOMC in a less hawkish direction,” says Millan Mulraine, deputy chief economist at TD securities.

The implication for borrowers is obvious: without Fisher and Plosser casting votes in favor of tighter policy, the Federal Open Market Committee (FOMC) will likely take longer to begin raising rates, which should keep upward pressure on mortgage rates subdued well into next year.

Plosser has long warned about the dangers of leaving rates too low for too long. Many economists blame the Fed for keeping rates too low in the middle of the last decade, ultimately contributing to the housing bubble and eventual bust.

Plosser’s views have been seen by many to be gaining traction at the Fed – the central bank will finish winding down its stimulus program next month, and most economists see it commencing a series of rate hikes next year, although without the hawks around to influence policy those expectations have diminished somewhat.

With Fisher and Plosser both gone, the Federal Reserve board will be composed almost entirely of dovish members who never met a rate cut they didn’t love or a stimulus program that shouldn’t be expanded. The only remaining Fed officials who lean even slightly hawkish are Esther George of the Kansas City Fed and, to a lesser extent, Jeffrey Lacker of the Atlanta Fed. Both George and Lacker have warned about the dangers of leaving rates too low for too long, but with their more hawkish colleagues retiring they will soon find themselves hopelessly outnumbered when the time comes to cast votes at FOMC meetings.

From a mortgage perspective, borrowers with adjustable rate loans will probably benefit most from these announcements, especially if their mortgage is tied to an index that’s derived from the benchmark Fed-funds rate. When the FOMC does vote to finally raise rates, Fed-funds is the rate that actually gets adjusted higher. The longer it stays at zero the better for most adjustable rate borrowers.

Of course, there is a chance, albeit a slim one, that Plosser and Fisher will both be replaced by incoming Fed presidents of any equally hawkish bent. That would not be in accordance with recent history, however – most Fed appointments since the financial crisis have gone to candidates with dovish views.