The Federal Reserve is distorting financial markets with its massive easing program, inflating stocks artificially, says James Grant, editor of Grant's Interest Rate Observer.

The Fed is engaged in "monetary manipulation" through its $85 billion of monthly bond purchases, Grant told CNBC.

"The stock market is now a tool of Fed policy," he said.

The Standard & Poor's 500 Index has gained 24.8 percent so far this year.

"What the Fed is doing is an exercise in price control. This is 'stocks.gov' [and] 'bonds.gov,'" Grant quipped.

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"The clear and present risk of the stock market is we're living . . . in a hall of mirrors," because the Fed's easing has upended valuation models for the market, Grant noted.

"Clearer than the proposition that the stock market is too rich is the proposition that the stock market is being led, rather than leading itself, through the discovery of earnings and how to discount them. The Fed can change how things look. It can't change what way things are."

Few Americans are benefiting from Fed policy, he said. "This is the policy of the 0.1 percent."

Former Fed Vice Chairman Alan Blinder says the problem with the Fed's quantitative easing over the past year is that the $1 trillion it has pumped into the banking system hasn't circulated through the economy.

"It all got bottled up in the banks, and essentially none of it . . . got lent out," he told NPR.

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