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Mark Thoma: How Long Will It Be Until the Fed Raises Interest Rates?

He peers into his crystal ball:

How Long Will It Be Until the Fed Raises Interest Rates? - CBS There’s another factor that increases uncertainty about the future of the economy, and hence argues for continued monetary accommodation. Oil prices are rising, and if they continue to do so that could put a substantial drag on the recovery.... For that reason, keeping the target interest rate at its present level for an extended period of time is warranted (and I agree that there is no indication at present that the Fed intends to change the federal funds rate “anytime soon”).... [I]n this case, rising prices are not a signal that monetary policy is too loose. The price increases are due to worries about oil supplies. Some people will try to argue for interest hikes based upon these price increases, but that would be the wrong response.

The other factor that could come into play is budget reduction. As we are seeing right now, state budgets are still in shambles largely from the effects of the recession, and there is considerable pressure to take action on the federal budget. Budget cuts at all levels of government — which will involve loss of jobs and cutbacks in spending — will reduce demand and slow the recovery.... The Fed should also maintain an accommodative stance to offset, as best they can, the effects of any premature fiscal contraction.

I agree with the forecasts given above, though I’m probably more worried than they are about a wave of hawkishness coming over the Fed at the slightest hint of positive data. But my best guess it that the Fed will keep the federal funds rate at its present level through the end of the year and perhaps a bit longer. I also believe this is the correct policy...