Last week, Ben Bernanke's testimony before Congress served as a stark wake-up call that inflation is not going away so easily. Later in the week, hard data backed that up. PCE, the Fed's favorite inflation gauge, beat expectations and pushed the year-over-year increase to 2.4%.
The Fed hopes that PCE will be 2.0% by 2008 and -- if markets aren't lowering inflation on their own -- the Fed can increase the Fed Funds Rate to help drive PCE down to that figure. A higher FFR would squeeze profit margins for business and that would slow down the economy.
This week, the major data event is Friday's jobs report. Stronger than expected growth in jobs will lead to a jump in mortgage rates because markets will shift their expectations for inflation and a weakening dollar.
In addition, rising oil prices may also place upward pressure on mortgage rates so watch for news from Iran about oil supply disruptions or other conflicts.
