Ron Paul to Fed: Hands off interest rates

The Federal Reserve is expected to announce on Wednesday further tapering while holding its benchmark interest rate near zero, but the central bank is wrong to manipulate interest rates at all, former Republican congressman and presidential candidate Ron Paul told CNBC.

(Read more: Wall St eyes Yellen for possible job target shift)

"It's an illusion. I don't think any one individual knows how to plan the economy by manipulating interest rates. Interest rates are so important that if you give this power to one small group or one individual, there will be distortion," Paul said Wednesday on "Squawk on the Street."

"So sometimes you have housing bubbles and sometimes you have housing busts, then you have housing bubbles and bond bubbles that's all [the] result of the manipulation of interest rates, which is my real objection to it."

Paul, a staunch critic of the Fed, doesn't hold much hope for Chair Janet Yellen either. Thirty minutes after the release of the central bank's policy decision Yellen will hold her first press conference as head of the Fed.

But Paul contended the ability to influence interest rates is too powerful of a tool for any one person to hold, be it Yellen or otherwise.

(Read more: Yellen's media debut: Plenty at stake politically)

"I think it's the invisible hand that we lack, not the wisdom of a few people. Few people can't be wise enough to dictate the market. That's why socialism always fails. So one half of our economy is socialized, because it's the control of the money supply, the control of the interest rates," Paul said.

"We don't believe they're capable of doing it and I think history shows that the record is pretty bad."

Paul noted that although the stock market has performed well lately, the economy at-large continues to struggle, in terms of unemployment and wage growth.

"The economy on the surface looks good, but if you look at hardcore unemployment and standard of living of the middle class, there's still a lot of problems out there," Paul said. "So if we look only at the stock market, then we're in denial."

—By CNBC's Drew Sandholm. Follow him on Twitter @DrewSandholm.