Domestically, the 30-year low in the unemployment rate is finally leading to wage pressure and that will pose problems for earnings in an overvalued stock market, added Roach, who served as Morgan Stanley Asia chairman for five years.

Those tariffs will hit China-centric supply chains, while the revision to NAFTA will raise the price of North American vehicle costs, he explained.

"Supply chains have been a major force holding down global and U.S. inflation, and they are being unwound by tariffs on China," he said on CNBC's " Power Lunch ."

Inflation risks are mounting and the Federal Reserve's "glacial" normalization pace isn't adequate to cope with it, Yale University's Stephen Roach warned on Thursday.

President Donald Trump is on the opposite side — blaming the Fed's rate increases for the recent sell-off in the stock market.

On Wednesday, Trump said the Fed is "going wild." And on Thursday, he doubled down on his attacks, saying Chairman Jerome Powell is being too stringent with monetary policy and is making a mistake.

"It's a correction that I think is caused by the Fed and interest rates," Trump said from the Oval Office. "The dollar is very strong, very powerful — and it causes difficulty doing business."

CNBC's Jim Cramer has also ripped the Fed, blaming Powell for not looking more closely at economic data before announcing its lockstep interest rate hike plans.

U.S. stocks fell sharply on Thursday amid fears of rapidly rising interest rates and a possible global economic slowdown. The Dow Jones Industrial Average plunged over 500 points, bringing its two-day losses to more than 1,300 points.

The Fed has raised its benchmark rate three times already this year, most recently at the end of September, a move that has helped send Treasury yields to multiyear highs in October. The central bank meets two more times this year and is expected to hike rates one more time. It also has projected three hikes in 2019.

Roach said if the Fed sticks to the course of action it has laid out thus far, it will be behind.

"The Fed has to be forward-looking. They have to set rates today with an eye toward where core inflation is going to be 12 to 18 months out," he said. "Today, the so-called forward-looking federal funds rate is identical to the backward-looking core-inflation rate."

The so-called core inflation rate index, the Consumer Price Index, increased 0.1 percent last month. In the 12 months through September, the CPI increased 2.3 percent.

However, if there are supply chain disruptions and higher wages, that core rate will go up to 3 percent, said Roach.

That would require the Fed not to be neutral but more restrictive, he added.

"That could put upside to the funds rate in the 200 to 300 basis-point range from present levels," he said.

— CNBC's Jennet Chin and Fred Imbert and Reuters contributed to this report.

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