El-Erian: How long will the Fed's elixir last?

Mohamed El-Erian
Emile Wamsteker | Bloomberg | Getty Images
Mohamed El-Erian

By maintaining an unchanged policy stance, the Federal Reserve delivered on consensus market expectations. The question now is: How long will this sustain the mix of financial conditions that the Fed and investors desire, and — most importantly — is needed to improve job prospects given the extent of Congressional dysfunction? Namely, strong equities and no undue disruptions to fixed-income markets, housing finance and the economy's broader financial conditions.

To answer this question, we need a good handle on how quickly the Fed will be able to move from relying on (ultimately) transitory sources of support for markets to well-entrenched improvements in underlying economic fundamentals.

Unfortunately,today's statement didn't advance much our collective assessment of how the Fed sees its policy experiment evolve from here — particularly with respect to future benefits for the economy, longer-term collateral damage and unintended consequences.

Accordingly, to understand better what lies ahead, investors need to assess and re-assess the two sets of "big threes" that have enhanced recent market gains.

(Read more: Taper tease? Market worries Fed will end easing)

The first set has to do with the Fed's big three policy tools.

Here, the central bank pleased investors by maintaining floored policy rates, accommodative forward guidance and $85 billion in monthly purchases of securities. In the process — and particularly after the taper scare of May-June — markets have been rewarded for regaining confidence in the notion of a "Fed put."

When it comes to the economy, however, the Fed was a lot less clear today on how it see the other big three evolve — namely the channels through which its policies impact private-sector behavior.

The Fed's current policy stance enables a further shift in portfolio allocation to risk assets, higher corporate buybacks and dividends, and, most importantly, additional time for the real economy to heal.

It is important to periodically remind ourselves that Fed officials are not interested in financial-asset prices as an ultimate objective. Rather, they regard them as a means to generate higher growth with stable inflation.

At a time when political polarization undermines comprehensive policy responses, financial markets are the Fed's only large-scale conduits to the real economy — albeit highly imperfect and distortionary conduits.

(Read more: Slightly less dovish Fed sends ripple through the market)

With the Federal Open Market Committee statement out of the way, attention now shifts to the release of the FOMC minutes. Together with a string of economic-data releases, they will shed greater light on the future evolution of the "benefits, costs and risks" of the Fed's current policy stance.

In the meantime, don't look for much change in the large disconnect between a buoyant Wall Street and a still-muted Main Street. Over the longer-term, however, only a broad-based and durable economic recovery can validate the current pricing of many financial assets.

As yet, there is insufficient evidence to assure us that Fed policies will indeed succeed where it matters most — on Main Street.