The Federal Reserve's continuation of a highly accommodative monetary policy, even as it tapers its quantitative easing, spells trouble for the economy and financial markets, says James Grant, editor of Grant's Interest Rate Observer.

While the Fed is likely to announce another reduction in its bond purchases Wednesday, many economists expect the central bank to keep short-term interest rates near zero until at least mid-2015. And Fed officials indicate they won't trim the central bank's $4.3 trillion balance sheet quickly.

The Federal is "pouring fire [on the] glowing embers of inflation," Grant told CNBC.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

"The Fed, with a remarkable lack of self-awareness, is now deploring the complacency of the capital markets, with the Fed having administered the sleeping potion," he insisted.

"The interventions are like lies — you do one and you need another one. You can't just lie once. You can't just intervene once. You must keep intervening to negate or counteract or mollify the effect of earlier interventions," Grant argued.

Consumer prices rose 2.1 percent in the year through May and will likely continue to increase moderately, he noted.

But inflation of asset values — stocks continue to hover near record highs — will ultimately lead to "financial turmoil," Grant warned. And that in turn could create the risk of deflation again.

"Deflation is a monetary event such that prices collapse, not because productivity is higher but because everyone has to sell. And that is part and parcel of a financial accident," he said. "The Fed is going to give us a financial accident."

Meanwhile, Larry Summers, a former top economic adviser to President Obama, believes the Fed will keep short-term interest rates below historical levels for some time, creating risks of financial bubbles.

"I suspect unless circumstances change, fed funds rates may well average less than 3 percent over the next decade," he told The Wall Street Journal.

The normalized federal funds rate is historically approximately 4 percent. The Fed's current fed funds target stands at a record low of zero to 0.25 percent.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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