Government policy will be the key influence in how the economy acts in 2009, Pimco co-CEO Mohamed El-Erian told CNBC.

"Pay particular attention to government action," El-Erian said in a live interview. "The government, whether we like it or not, is going to be a major determinant of both relative and absolute value in '09."

In particular, he said the stimulus package to be fashioned between President-elect Barack Obama and the Democratic Congress will be watched closely on Wall Street to see who wins and loses.

"The government is going to be a major price-setter going forward," he said.

El-Erian said the new year promises to be a "bumpy journey" in which investors should shift their focus from the safety of government Treasury notes and into other vehicles.

Among his recommendations are municipal bonds, Federal Deposit Insurance Corporation-backed paper, high-quality investment grade bonds, bank debt and Treasury Inflation-Protected Securities, or TIPS.

"There's a whole range of instruments that are protected" from risk, he said.

But the best investment decisions, according to El-Erian, will be those based on policy adjustments of the incoming administration.

"'08 was a year when the unthinkable was thinkable. Why? Because Wall Street got caught offside," he said. "There was a massive implosion of the financial sector and there was a contamination in the real economy. In such an environment policy mistakes are inevitable. The story for '09, for this coming year, is a recognition that we are now in the midst of this bumpy journey to a new destination."

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