Disagreement among Federal Reserve policymakers over how fast to raise interest rates and shrink its balance sheet will hurt bonds and possibly stocks, says former Fed Vice Chairman Alan Blinder.

The Fed's doves want the tightening to happen more slowly than its hawks.

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The central bank's federal funds rate target has stood at a record low of zero to 0.25 percent since December 2008. Many economists don't expect the Fed to raise rates before the middle of next year. But some Fed hawks have indicated they would like to act sooner.

"I worry about disruptions in the financial markets, as the Fed starts making more and more noises about exit strategies of various sorts," Blinder told MarketWatch.

"I think there is likely to be a vocal debate over that. And that will hurt [boost] interest rates. It might hurt stock prices, too, but it will certainly hurt interest rates."

As for the Fed's $4.3 trillion balance sheet, if the central bank keeps it close to that size for a period of years, as Fed policymakers indicate it will, the Fed will continue to play a large role in the credit markets.

That could lead to market distortions, experts say.

"The whole situation has created a lot of uncertainty," Karl Haeling, head of strategic debt distribution at Landesbank Baden-Wuerttemberg in New York, told Bloomberg News. "The Fed is increasingly stepping into what had been a private-sector function."

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