Residential mortgage interest rates have remained quite steady for the last year and a half but the last week of June in 2013 brought on the largest three day increase in rates in at least ten years.

According to Mathew Graham, columnist for Mortgage News daily, “These three days toward the end of June were freakishly destructive; the worst week for mortgage rates we have on record.”

Others described the week as unprecedented and few claimed to have anticipated that rates would increase by more than .25% (quarter point) in three days. This may not sound like a much but in terms of daily movements in the mortgage industry it is the equivalent of an enormous financial storm. Rates which remained under 4% for almost two years now suddenly hit highs not seen since late 2011.

Rates change daily. In fact on some days they change four to six times. They tend to move in small increments often referred to as basis points (bps). One basis point is .01% or 1/100th of a percent. Rates often move in increments of 5 to 10 basis points but rarely more in any one shift. That is if the current rate were 3.75% and rates increased 5 bps the resulting rate would be 3.8%. Through three days in June rates increased more than 250 basis points and through the month increased almost 750 bps or .75% on rate.

The sharp increase was attributed to Federal Reserve Bank Chairman Ben Bernake’s June 19th news conference at which he said the central bank may end the $85 billion per month bond buying program by the middle of next year as long as the economy continues to improve. The bond buying program was an effort to keep interest rates low in hopes of stimulating among other things home and auto purchases. The concern for many is that these increased rates will slow down purchasing and compromise the gains the economy has made.

Maybe this is a good place to pause to ask who or what the Federal Reserve Bank is. It is actually a federal reserve system made up of twelve Federal Reserve Banks. They are jointly responsible for implementing money policy and regulating the commercial banks in their own particular district.

Like Federal Express the Federal Reserve sounds like a government owned and managed organization but like the overnight carrier the Fed is private, not public. In fact, it is a group of interrelated private corporations, independent from ( but entirely enmeshed with) the US Government that controls the movement of money throughout American Finance. It is subject to Congressional oversight so it is not so much independent of government but rather independent within government. They used to actually control the amount of money available to circulate but these days they have the same impact via the lowering or increasing the overnight bank lending rate (which is directly related to prime- currently the overnight bank lending rate is as low as it can be – .25% and prime is, as always, 3% higher at 3.25%) as well as purchasing bonds as described above in an effort to keep long term interest rates down. The ‘Fed’ was created by an act of Congress in 1913 and their responsibilities and duties have expanded and evolved over the last century. As noted earlier they affect interest rates and inject money into the system though the purchase of bonds. Additionally the Federal reserve system provides the government with a steady source of loans and serves as a safe depository for federal monies. They also provide a mechanism for transferring funds between bank and government and assist in meeting payments on national debt and government salaries.

Not everyone is in agreement about either the powers or necessity for such an institution. Since it’s inception the Federal reserve system has been criticized as too big, too powerful and unaccountable to the American people. Chairmen aren’t elected but rather appointed by the president and this appointment is made with the needs of big Wall Street Banks in mind according to critics. Libertarian and other independent politicians often call for more regulation and transparency while others call for the end of the system altogether.

Regardless of one’s opinion of the system there’s no argument over the great impact the system has on the country’s economy. Last week it took only the suggestion of a policy change next spring from Chairman Bernake to catalyze the largest three day increase in rates ion at least ten years.

Written by Ted Dimond