Fed at risk of falling behind, says former New Zealand central bank governor


The US Federal Reserve is at risk of falling behind on interest rates, a former Reserve Bank of New Zealand governor told CNBC on Friday.

“Inflation is rising quite high, labor markets are tight in the United States and the question is how transient the inflation rate is and how transient 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 doesn’t just delay rate hikes, it also keeps pumping money into the economy and that should continue until next year.

“I am a little worried that they are late,” he said.

After their meeting in early November, Fed officials said the U.S. central bank would start slowing its bond purchases to a rate of $ 15 billion per month, ending the bond buying program in the United States. mid-2022. After that, the door would be open. for the Fed to start raising rates.

But, the minutes from the November session indicated that Fed members would be willing to hike interest rates earlier than expected if prices continued to rise.

Market participants now expect the central bank to discuss at next month’s meeting whether to end its bond buying program more quickly.

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The Fed took unprecedented steps to ease policy when the coronavirus pandemic struck early last year. He cut rates to zero and instituted a $ 120 billion monthly bond purchase program to support financial markets and the U.S. economy.

Other central banks have already started cutting some of the extraordinary levels of support they have given to their respective economies as a result of the pandemic. For example, the Bank of Korea, the State Bank of Pakistan and the Reserve Bank of New Zealand recently raised their rates. The recent New Zealand central bank rate hike was the second in as many months.

Commerce and geopolitics

In a high-profile interview, Brash also touched on the ongoing developments around the Comprehensive and Progressive Trans-Pacific Partnership – an 11-country mega trade pact, which includes New Zealand, formed in 2018 after Donald Trump withdrew the States – States of the Trans-Pacific. Partnership a year earlier.

China, the UK and Taiwan have all in recent months asked to join the trade pact in an effort to gain better market access. But analysts say US allies like Australia, Canada and Japan could block Beijing’s bid because they increasingly see China as a “strategic threat.”

“Well, personally I would 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 Comprehensive Regional Economic Partnership.

When asked if there could be a further escalation of tensions between the United States and China, Brash said there was “a serious risk of this” happening.

“China is clearly the rising power,” he said. Brash explained that if China’s per capita income reached even half that of the United States, the Chinese economy would become considerably larger, which “obviously” created tensions.

Tensions between the two countries escalated under former US President Donald Trump, starting with trade and tariffs on billions of dollars in goods and spreading to other areas like technology and geopolitics .

US President Joe Biden and Chinese President Xi Jinping virtually met this month in the closest communication between the leaders of the two countries since Biden took office.

CNBC’s Patti Domm contributed to this report.


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