Why Fed will backtrack on rates in 2016: Jim Grant

The Federal Reserve will regret its interest rate hike in December and will be forced to backtrack in 2016, closely followed market watcher Jim Grant said Monday, as global stock markets were selling off on Chinese economic weakness.

Many economists expect more rate hikes from the Fed this year, but Grant argued that the cost of borrowing money is more likely to go back to zero percent.

Read MoreWall Street set for steep sell-off on China worries

"I think what they are going to do is not what people expect," he said. "As [the Fed] read the data, it felt it had to move. It had been saying for so long that it would. It had to and it did. But that doesn't mean it was right to do so."

"They missed their mark," the founder and editor of Grant's Interest Rate Observer told CNBC's "Squawk Box." He said the Fed should have increased rates years ago, which would have allowed asset prices to reset.

"As hard as it might have been, it seems to me a market-driven recovery with price discovery rather than price administration would have been the way forward," he said.

The Fed's easy money policies, including rock-bottom rates and years of massive bond purchases, "postponed the adjustment" in markets that need to happen eventually to make an "economy work more rationally," he continued.

Contrary to Grant's comments on interest rates, Cleveland Fed President Loretta Mester said Sunday she does not need to see clear evidence of inflation to back additional policy tightening.

Looking at the year ahead, Grant predicted, "weakened consumption, especially for cars, and the manifestation of business failure that was masked or shrouded by these ultra-low rates."

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