WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan and his colleagues have a public relations problem: The inflation numbers look terrific, and could get better.
In the last six months, the Labor Department's consumer price index has increased at an annual rate of 1.9%. Wholesale prices, as measured by the government's producer price index, have hardly increased in the last year..
The collapse in world oil prices promisess to bring consumers more good news in the government price data for December.
Fed officials are close to achieving their long-sought world of zero inflation.
Reason to Tighten
The problem for Mr. Greenspan and other members of the central bank is that no obvious rationale exists to begin tightening monetary policy to head off an increase in inflation, which is what the bond market expects the Fed to do.
In fact, President Clinton reportedly said this week that it would be a mistake for the Fed to raise short-term rate because there is no evidence of an inflationary trend.
Cranky bond investors do not believe inflation has been licked and are looking for the Fed to start raising short-term rates, possibly in a few months.
To complicate matters, governmental data collectors are changing the methodology used in the household survey prepared each month by the Bureau of Labor Statistics.
Lagging Indicators
The revised methodology, which is supposed to be more accurate by measuring women and minorities seeking work, could push the jobless rate back toward 6 3/4% in January.
With the job market still looking moribund and inflation on the mat, only economists on Wall Street can understand why the Fed may move to raise rates.
The argument making the rounds is that while the economy is not booming, at 3% it appears to be growing slightly above the long-term rate of 2 1/2% that is judged healthy for containing inflation.
Moreover, economists and Fed officials know from experience that inflation and unemployment are lagging indicators. If policymakers wait until prices start to rise before tightening credit, they end up chasing the bond market and pushing rates higher than they would have to otherwise.
|Preemptive Strike'
Fed officials have not made up their minds yet to raise rates. But Fed Vice Chairman David Mullinss said last week that they do not want to repeat the experience of the late 1980s, when rising inflation forced rates progressively higher.
So talk percolates in the bond market about a "preemptive strike" by the Fed against inflation. A panel of economic advisers for the Public Securities Association calculated that by June the Fed will nudge the rate on 90-day Treasury bills from 3.1% to 3.5%.
But the panel said the yield on the Treasury's 30-year bond will be little changed at 6.2% if the market sees a tough Fed.
Soothing the Market
The intricacy lies in the way the bond market works, with the Fed controlling short-term rates directly and long-rates only indirectly through the degree of confidence investors have in the inflation outlook.
This subtlety is lost on the general public, which sees little inflation while headlines announce layoffs by Xerox Corp., Eastman Kodak Co., International Business Machines Corp., and AT&T.
President Clinton came into office gambling that low interest rates would stoke the economy and compensate for cutbacks in federal spending. It is still a valid trade, but the bond market is now asking for a small token of affection.
