The Federal Reserve needs to return interest rates to more normal levels and free financial markets from government-sponsored price control, said Jim Grant, founder of Grant's Interest Rate Observer.
The real value of asset prices would come in "clearer focus" if rates were not so artificially low, he said on CNBC's "Squawk Box" Friday, a day after a 334-point drop in the Dow Jones industrial average—the worst day since February and the third straight move in either direction of 200 points or more.
"Interest rates now are not discovered as one discovers prices in a free market. They are administered and imposed," he said.
Since the financial crisis, the central bank's easy money policies have been encouraging a shift into riskier assets, said Grant. "The Fed was wanting us all to get out of savings accounts and into junk bonds and equities. It was very pleasant when the getting in was going on. Now perhaps, it's time for the getting out."
October is traditionally one of the worst months of the year for stocks (though not in the past few years). So far this month, the Dow has fallen 2.25 percent as of Thursday's close. Blue-chips are at risk of wiping out all the gains for the year, as stocks are poised for their biggest weekly losses in more than two months.
In this period of volatility, Grant advises investors to look on a stock-by-stock and market-by-market basis.