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Fed created 'gross distortions,' says Ron Paul

Former GOP presidential candidate Ron Paul told CNBC on Thursday that investors should not be fooled by the Federal Reserve's "little" taper, as it is still manipulating the price of money and interest rates.

The Fed said Wednesday that the economy was strong enough for the central bank to begin scaling back its bond-buying program, but Paul called the taper too little, too late.

"There are still structural problems in the economy, and it's all related to monetary policy, and of course regulations and spending by our Congress," he said on "Squawk on the Street."

(Read more: Cashin: Bernanke made everybody right)

"They say they're going to taper, which means they have to buy less. … But then the Fed says, 'Well, we're going to guarantee that interest rates won't rise.' "But how do you keep interest rates from rising? You have to buy stuff," he said. "In some ways it's a little bit schizophrenic.

"This whole policy of pretending that they're having major changes, and not buying quite so many bonds, and buying short term bills instead—[that] could change in a minute," Paul added.

This is not a good time to invest in the stock market, he said.

(Read more: An interview with the real 'Wolf of Wall Street')

"When I look at the stock market, I don't think it justifies what's happening there. ... I think right now is rather dangerous."

The U.S could be headed for another downturn, an event that he says incoming Fed Chair Janet Yellen cannot handle.

If "the economy goes into recession—which I expect—that would be like saying to Janet, 'Boo!' " Paul said.

"She is not going to cut back anymore," he said. "She believes ... in the inflationary policy of the Fed's printing and buying [bonds more] than even Greenspan and Bernanke."

—By CNBC's Karma Allen

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