Federal Reserve

Taper this week? More than 50-50 odds: Ex-Fed gov.

Here is why the Fed needs to taper: Expert

The financial markets should not drive the decision on whether the Federal Reserve starts scaling back its $85-billion-a-month quantitative easing bond purchases, former Fed Governor Frederic Mishkin told CNBC on Monday.

The central bank's final policy-setting meeting of the year will be held over two days starting Tuesday.

"As long as the markets are stable ... and Congress looks like its backing way from this [budget] insanity, all of that helps them to think about moving to [forward guidance] as the main tool of monetary policy," Mishkin said in a "Squawk Box" interview. But "you don't want to get into this circular kind of situation where you always follow the market." He said he thinks the market will come to understand the need for the Fed to slow its rate of asset buying.

(Read more: Why Fed could rock market no matter what it does)

Putting the odds in favor of a taper at this week's meeting at more than 50 percent, Mishkin made his case for why the Fed should act.

"There's a balance sheet capacity of the Fed and they're running up against that. They don't want this huge balance sheet," Mishkin said. "Also they don't plan to sell assets. So this is why they need to taper. And I think they should have earlier."

(Read more: Fed's dreaded 'taper' may not hurt after all)

All the rounds of QE in recent years have swollen the central bank's balance sheet to nearly $4 trillion.

By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.