Rates improved following this morning’s release of the April Core PCE price index, the Fed’s preferred inflation indicator, showing an annual increase of 2.1%. Although the Fed would like to see this level fall below 2%, the data was in line with expectations. Even with today’s gains, the mortgage-backed securities market has seen a rough week, with rates having risen about 1/4% since Monday. Yesterday, Dallas Fed President Richard Fisher commented that if the inflation outlook continues to worsen he expects a change in monetary policy will occur “sooner rather than later”. Futures on the Chicago Board of Trade now show a 31% chance the Central Bank will raise the target Fed Funds rate by at least 1/4% in September. Ultimately, a hawkish attitude on inflation by the Fed will benefit the market by holding down long-term fixed rates, since inflation erodes the value of fixed rate securities.