Money and credit growth in the U.S. has now become inflationary and is encouraging another bubble in stock markets, according to the chief economist at London-based consultancy firm Lombard Street Research.

"The Fed has put market sentiment before the economy yet again. It is doing U.S. stocks no favors by provoking an unnecessary bubble with its certain subsequent burst," Charles Dumas said in a new research note Thursday, following the decision by the U.S. Federal Reserve to defer its next rate hike.

"The economy is running hot, led by consumers. Productivity growth has slumped to 0.5 percent, meaning GDP (gross domestic product) outpaces potential growth by more than 0.5 percent. With inflation already on target, the Fed is encouraging yet another bubble-bust," he added in the note entitled "Fed's costly failure = 2017 bear market."



Since the global financial crash of 2008, central bank policy has focused on buying up bonds in large quantities and cutting interest rates to record lows. The Fed has since looked to unwind this policy and performed one rate hike at the end of 2015. Many still anticipated another rate hike before the end of the year.

Dumas believes that the Fed "helpfully" aided money growth and borrowing following the crash but is now stoking inflation. Furthermore, the negligible cost of borrowing in this "overheated economy" has boosted corporate borrowing that has not trickled down to the real economy. Instead, large companies are using the cash to buy back a portion of its own shares, he said.