The Federal Reserve's decision last month to step up its buying of Treasury securities could be laying the groundwork for inflation and a host of other political and economic troubles, former Fed governor Frederic Mishkin told CNBC.
In a rare public dissent with the central bank, Mishkin, a professor at Columbia Business School who left the central bank in 2008, called the Fed's move to use receipts from maturing mortgage-backed securities to buy more Treasurys "one of the most important decisions the Fed has made in a very long time."
The purchases of long-term government debt—expected to total about half a trillion dollars—should be accompanied by an exit strategy, he said.
"When you hold a lot of long-term debt on your balance sheet, you're now exposed to a lot of interest rate risks," Mishkin said in a live interview. "All of a sudden you could be booking losses. Think about the screams in Congress about all of this."
The Fed decision at its Open Market Committee meeting stunned the financial markets, but at the time investor reaction was interpreted as worry over the central bank not doing enough.
Chairman Ben Bernanke, at a subsequent speech during the central bank's Jackson Hole, Wyo., summitlater in the month, temporarily assuaged markets with assurance that the Fed would be monitoring the economy closely and would step in when needed.
But Mishkin said the Fed's program to buy Treasurys is a risky move. While he stopped short of saying he would have voted against it if he was still an FOMC member, he called the move a "remarkable shift" in policy that is similar to the short-term outlook that fiscal and monetary policy is taking in Washington.
"It doesn't mean we should rule out large-scale asset purchases," he said. "It just means the threshold should be very high and if they're going to do it they better have a commitment to a long-run strategy to shrink that balance sheet."
He also defended the Fed's actions during the height of the financial crisis, but said the economy has changed and what worked then to avoid "something much, much worse" may not work now.
"The large-scale asset purchases, the expansion of the balance sheet, were exactly the right thing to do during the depths of the crisis. It's not as clear that they're as effective at this current juncture," Mishkin said. "My view is you better think of the long-run costs pretty damn hard and then ask are the benefits sufficient to pull the trigger."