Federal Reserve

Is this the ‘lion in the grass’ for the Fed?

Inflation is lion in the grass: Former Fed governor

Inflation may not be a concern for the Federal Reserve right now but it could be the "lion in the grass" that takes the central bank by surprise, former Fed governor Robert Heller told CNBC Thursday.

The U.S. central bank on Wednesday started a long-awaited tapering of its asset-purchase program. It said it would cut its monthly stimulus by $10 billion to $75 billion from January and that interest rates would remain low for some time.

(Read more: Fed to taper bond buying by $10 billion a month)

Asked about whether inflation could be a possible risk to the outlook for monetary policy, Heller told CNBC Asia's "Squawk Box": "I think you have it right there, it's the lion in the grass, it's hiding there."

The U.S. consumer price index (CPI) rose 1.2 percent in November from a year earlier. The Fed has a 2 percent inflation target, although it follows a gauge that tends to run a bit below the official CPI.

(Read more: US consumers see flat prices in November)

And the latest Fed statement suggests too-low inflation is more of a concern than high inflation right now. "The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance," Wednesday's statement read.

People carry shopping bags along Broadway on December 2, 2013 in New York City.
Getty Images

Still, the potential for an upside surprise in inflation should not be underestimated, Heller said.

"The potential for inflation is huge. We have huge excess reserves in the banking system and once the banking system feels confident in the economy and banks start lending again, that could ignite inflation quite quickly," Heller added.

"All we need is a little bit more tightness in the labor market, a couple of strikes and here we go. So it is a danger that is ever present," he said.

(Read more: Now that the Fed's out of the way, it's Santa's turn)

Tai Hui, chief Asia Pacific strategist at J.P. Morgan Funds, agreed that inflation could become more of a risk if banks start to ramp up lending, fueling economic activity.

"If you look at the amount of liquidity pumped into the economy by the Fed and other central banks, this has not really been utilized by banks," he told CNBC.

"This is crucial because if the banks start to lend out more aggressively we could see inflation risks return to the fore, but at the moment banks are still quite conservative in lending and that should help keep inflation at bay in the near term," he added.

— By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC