The U.S. Federal Reserve runs the risk of running behind the curve on interest rates, a former governor of the Reserve Bank of New Zealand told CNBC on Friday.
“Inflation is pushing up quite high, labor markets are tight in the U.S., and the question is how much of the inflation rate is transitory, and how much is not,” Donald Brash said on CNBC’s “Squawk Box Asia.”
Brash, who was governor of New Zealand’s central bank between 1988 and 2002, said the Fed is not only holding off on hiking rates, they are also still pumping money into the economy and that looks set to continue well into next year.
“I am a bit concerned they’re behind the curve,” he said.
After their early November meeting, Fed officials said the U.S. central bank would begin to slow its bond purchases at a pace of $15 billion a month, effectively ending the bond-buying program in the middle of 2022. After that, the door would be open for the Fed to begin lifting rates.
But, meeting minutes for the November session noted that Fed members would be willing to raise interest rates sooner than anticipated if prices keep rising.
Market participants now expect the central bank to discuss at next month’s meeting whether it should end its bond-buying program more quickly.
The Fed took unprecedented moves to ease policy when the coronavirus pandemic hit early last year. It cut rates to zero and instituted a $120 billion monthly bond-buying program to support financial markets and the U.S. economy.
Other central banks have already started dialing back some of the extraordinary levels of support they provided to their respective economies due to the pandemic. For example, the Bank of Korea, the State Bank of Pakistan and the Reserve Bank of New Zealand raised rates recently. The New Zealand central bank’s recent rate hike was the second in as many months.
Trade and geopolitics
In a wide-ranging interview, Brash also addressed ongoing developments around the Comprehensive and Progressive Trans-Pacific Partnership — an 11-nation mega trade pact, which includes New Zealand, formed in 2018 after Donald Trump pulled the U.S. out of the Trans-Pacific Partnership a year earlier.
China, the United Kingdom and Taiwan have all, in recent months, applied to join the trade pact in a bid for greater market access. But analysts say that American allies like Australia, Canada and Japan may block Beijing’s application as they increasingly view China as a “strategic threat.”
“Well, personally, I’d like to see as many countries as possible in the CPTPP,” Brash told CNBC, adding that the trade pact was a “better trade deal” than the China-led Regional Comprehensive Economic Partnership.
Asked if there could be further escalation of tension between the United States and China, Brash said there is “serious risk of that” happening.
“China is clearly the rising power,” he said. Brash explained that if China’s per capita income rises to even half the level of that in the U.S., the Chinese economy would become substantially larger, which “evidently” poses tensions.
Tensions between the two nations escalated under former U.S. President Donald Trump, beginning with trade and tariffs on billions of dollars’ worth of goods and extending to other areas like technology and geopolitics.
U.S. President Joe Biden and Chinese President Xi Jinping virtually met this month in the closest communication between the two countries’ leaders since Biden took office.
— CNBC’s Patti Domm contributed to this report.