Central Banks

Fed is still way behind the curve after rate hike, says former governor

US interest rates should be 3%: Robert Heller
US interest rates should be 3%: Robert Heller

Interest rates in the United States should have hit normal levels of around 3 percent by now given that the Federal Reserve has achieved all of its targets, a former Fed governor said Thursday.

Speaking to CNBC's "Street Signs" after the U.S. central bank increased its benchmark rate by a quarter point to a target range of 0.75 percent to 1 percent, Robert Heller reiterated his opinion that the Fed should have moved quicker to guide rates higher.

Heller served on the Fed's board from 1986 to 1989 under former President Ronald Reagan.

"We have very low unemployment rate of 4.7 percent, we have inflation roughly at 2 percent, so rates should be normal now. And normal…would be at 3 percent. Instead, we are below 1 percent," he said.

The Fed's statement after its two-day policy meeting indicated that the central bank expects another two moves this year. At that pace, interest rates would not normalize until 2019, he noted.

Being behind the curve puts the Fed in a difficult position, Heller said. If President Donald Trump's policies prove beneficial to the U.S. economy, the central bank may have to increase rates at a quicker pace and risk encountering a "political problem."

"If they move a lot faster in response to the Trump program, Trump may well argue that Fed is ruining the progress that they're trying to make in having even further economic growth, faster economic growth. I think that's entirely possible," he said.

Even then, markets seemed to welcome the central bank's decision to raise rates and its dovish stance. Most Asian markets rallied after U.S. stocks closed higher Wednesday.