WASHINGTON - Federal Reserve Board Chairman Alan Greenspan and his colleagues have a public relations problem - the inflation numbers look terrific, and they could get even 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 at all in the last year.
The collapse in world oil prices to less than $15 a barrel promises 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, in which consumers and businesses make decisions without fear of rising prices.
The problem for 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. 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, government data collectors are changing the methodology used in the household survey prepared each month by the Bureau of Labor Statistics. 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 past 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.
Fed officials have not made up their minds yet to raise rates. But Vice Chairman David Mullins said last week that they do not want to repeat the experience of the late 1980s, when rising inflation forced rates progressively higher.
"This is an important time for monetary policy. It seems quiet out there, but we're at an important crossroads," Mullins said.
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 next June the 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 30-year bond will be little changed at 6.2% if the market sees a tough Fed.
The intricacy lies in the way the bond market works, with the Fed directly controlling short-term rates, and long-rates only indirectly through the degree of confidence investors have in the inflation outlook.
This subtlety is lost to the general public, which sees little inflation while headlines announce layoffs by Xerox Corp., Eastman Kodak Co., IBM Corp., and AT&T.
But politically, Greenspan seems to have the maneuvering room he needs. President Clinton had kind words again last week for the way Greenspan is running the Fed and is on record in favor of higher rates in an improving economy.
Moreover, Clinton and his economic advisers do not appear eager to bail out of the bond market that they have so openly embraced. Clinton's aides point out that the administration's own economic forecast calls for short-term rates to rise to 3.6% this year, about what Wall Street expects. It is a tacit endorsement of a Fed tightening.
Clinton came into office gambling that low interest rates would stoke the economy and compensate for cut-backs in federal spending. It is still a valid trade, but the bond market is now asking for a small token of affection.