We ended August and started September with a little rally in the mortgage-backed securities market. Economic figures, while better than the last few months, aren’t pointing to a sustainable economic recovery.  The Fed noted that inflation is hardly at the top of their list in the near future:

After accounting for these factors, the underlying pace of core inflation seemed to be running a little higher than the staff had anticipated. Survey measures of inflation expectations showed no significant change. Nonetheless, with the unemployment rate anticipated to increase somewhat during the remainder of 2009 and to decline only gradually in 2010, the staff still expected core PCE inflation to slow substantially over the forecast period; the very low readings on hourly compensation lately suggested that such a process might already be in train.

That should be good for mortgage rates but there is a tempest in the teapost-a-brewin’.  The Fed might pull back on its mortgage-backed securities purchase program:

“We have to begin to pull back from our extraordinary programs,” Philadelphia Fed President Charles Plosser said yesterday while noting a risk of faster inflation in the future. Speaking in an interview with CNBC, he declined to say whether the Fed should begin raising the main interest rate next year.

Today, the Fed is 2/3 of the way through this “extraordinary” program.  The Fed originally committed $1.25 trillion, schedled to end this December.  THIS is the looming reason I believe traders will drive rates up after Labor Day.  My September, 2009 mortgage rates outlook is for rates to rise to the 5.5% level and subside back to the current 5.0% level in early October.

I think it’s prudent to lock September settlements immediately.  Late October settlements should have an opportunity to get a rate in the low 5′s after a scary spike this month.