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Fed not getting bright green sign yet: Former Fed gov

Former Federal Reserve Governor Mark Olson said the central bank will raise interest rates, but not Wednesday because there's still a yellow light flashing.

"There is no question, you do not want to have a zero-interest rate environment," said Olson, now with Treliant Risk Advisors. "That just begs the opportunity to go negative into a deficit of an economy and you don't want that. You need to have an inflation rate much higher than that, and therefore some premium [interest rate] above that point."

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Olson, who held his at the Fed from 2001 to 2006, said employment data were not completely solid. The participation rate is lower than it was a year ago, he said as Fed policymakers were finishing their two-day meeting Wednesday. "That's got to be enormously frustrating for the decision makers because they would like to see a bright green go sign and they're not getting bright green yet," he said in an interview on "Squawk on the Street."

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Olson expects that a rate hike could come in September. "They already announced that they are going to raise rates, it's a question of when," he said. "If [it doesn't happen in September], it will be in December, but they [Fed] would like to have the information be a little more firm."