Fed's housing preoccupation dangerous: Ex-Fed gov
The Federal Reserve should not be focusing as much on housing as a measure of the health of the overall economy, former Fed Gov. Kevin Warsh told CNBC on Tuesday.
"Housing and housing assets are going to give you one signal," Warsh said in a "Squawk Box" interview. "[But] there is a broader cross section of data from the consumer, from the business, from trade and from exports. So this preoccupation with housing strikes me as really quite dangerous."
One of the goals of the Fed's $85 billion in monthly purchases of bonds and mortgage-backed securities, known as quantitative easing, has been to support the budding recovery in the housing market—the crash of which led to the 2008 financial crisis.
(Read more: US home prices up the highest since 2006: Survey)
Investors have been hanging on every word out of the Fed for clues on when policymakers might start to scale back QE. Wall Street had widely expected tapering to begin in September, but it didn't materialize. With no changes in October, attention has turned to next month's meeting of the central bank.
"My sense is now as we get to the end of this year, early next year, QE has gotten a little tired in that room," the former Fed governor said. In a world according to Warsh, he said he'd make it clear that QE is "on a path to extinction." He explained that he'd lay out a committed course for winding down asset purchases from $85 billion a month to $65 billion to $45 billion and so on, barring "some extraordinary developments in markets."
(Read more: Fed's Lockhart: No taper until we're ready)
When looking at whether QE has worked, he said: "We should judge the Fed's performance by what they've promised us, [and] in my days, what we promised." He added that the Fed's economic models "have basically been wrong for about four or five years."
"The challenge for them in December is to convince the markets that both their economic forecasts are right," Warsh continued, "[and] interest rates will remain zero. My view is one of those has to give."
He argued, "If the economy is roaring as much as they say, markets will not believe that the Federal Reserve under Janet Yellen or anyone else will keep the fed funds rates at zero in that environment."
Last week, the Senate Banking Committee sent Yellen's nomination to be the next Fed chair for vote from the full Senate, where she's widely expected to be confirmed.
(Read more: Yellen clears Senate hurdle for Fed chair)
Warsh—who worked with Yellen during his time at the central bank from 2006 to 2011—pointed out that she would be "taking over at a very, very challenging moment for the Fed and for the markets."
He does not believe Yellen, who's currently vice chair at the Fed, is any more dovish than outgoing Chairman Ben Bernanke, but "there's no question that she believes in the efficacy of the Fed's tools."
Bernanke will be stepping down on Jan. 31, at the end of his second four-year term, which spanned two presidents and the worst economic crisis since the Great Depression.
"Financial markets tend to test new chairmen. They did it to Paul Volcker. They did it to Alan Greenspan," Warsh said. "They challenged Ben Bernanke and his new team eight years ago."
"I've got every bit of confidence that [Yellen] is going to realize that being chairman is frankly a very different set of responsibilities ... where most of us get to sort of chatter from the cheap seats. She's got to make the tough decisions."