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Dr. Doom: Watch out if the Fed makes this mistake

Nouriel Roubini, the bearish economist known as "Dr. Doom," warned investors to look out if the Federal Reserve waits too long to hike interest rates, which could consequently cause a huge market bubble.

"Last time around it took them two years to normalize from 5 to 5.25, too little too late … they created the biggest housing, real estate credit and equity bubble," Roubini said Tuesday on CNBC's "Closing Bell."

This time "it's going to take them up to four years to go from zero to a neutral 4 percent. The risk is that we are going to create another huge bubble in the economy."

Nouriel Roubini warned that global central banks could cause the next crisis if they continue to use monetary policy to stimulate growth.
Pete Marovich | Bloomberg | Getty Images
Nouriel Roubini warned that global central banks could cause the next crisis if they continue to use monetary policy to stimulate growth.

On the other hand, he said raising interest rates early could send the market into shock.

"They could start too soon and hike rates too much and that could lead to market consequences like we saw last year when there was a surprise with the Fed tapering," Roubini said.

Citing recent changes in the Federal Open Market Committee, he said another quantitative easing shocker would not be unlikely.

"Janet Yellen matters but under Bernanke, the Fed became a collegial democracy," Roubini said. "She [Yellen] is one vote out of 12, an important one, but the composition of the FOMC matters for when they start and how fast they normalize."