Why the Fed really wants to raise rates: Jim Bianco

Santelli Exchange: Fed credibility on the line
Santelli Exchange: Fed credibility on the line

Forget apparent improvements in the economy. There is another reason why the Federal Reserve wants to tighten monetary policy, Bianco Research President Jim Bianco said Friday.

"They're raising rates because of their words, 'financial stability.' They are worried that the markets have been distorted," he said in a CNBC "Squawk on the Street" interview. "Now, they can't say it that way."

Bianco made his remarks a day after Fed Chair Janet Yellen concluded two days of testimony before Congress. On Wednesday, she told members of the House that the central bank remains on track for the first rate hike in almost a decade.

Read MoreYellen: Remain on track to raise rates this year

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy," she said.

Nevertheless, Bianco dismissed Yellen's characterization of the economy, saying he believes it is worse now than back in 2012.

"If you look at the third quarter of 2012, the Fed eased and gave us open-ended stimulus," he said. "I would argue that the economy is equal or worse than it was [then], but now they want to tighten.