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Fed's Low Interest Rates 'Toxic' for Economy: Pro

While the U.S. Federal Reserve has reiterated it would keep interest rates near zero until late 2014, Sam Chandan, Chief Economist at Chandan Economics, says that low interest rates distort asset prices and are "toxic" for the economy.

United States Federal Reserve
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United States Federal Reserve

"An extraordinarily low interest rate environment has become our drug of choice in this country. But the potential impact on the economy over the long run, in terms of how it distorts the markets, is potentially quite toxic. (It is) something we got to back away from," Chandan told CNBC.

He adds that the U.S. has not had an "interest rate environment that looks anything close to normal for a long time" and when that happens it will be difficult to handle. He gives the example of the housing market, which is struggling to recover despite low mortgage rates.

"There are a lot of people who want to become homeowners but it's difficult for them to qualify for mortgage credit even though the price of the mortgages are very, very low," Chandan told CNBC. "We will begin to see an erosion of that affordability as interest rates begin to rise."

According to him loose monetary policy has "masked" underlying economic challenges in the country. "The continuing intervention through monetary policy makes it very difficult for us to assess whether private economies are allowed to function on their own or if these asset price trajectories are sustainable," Chandan said.

While it may be tempting to keep interest rates low, Chandan says, "Ultimately, we will reach a point where we need to balance out the fact that the economy has to run on its own legs."

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