Federal Reserve Chair Janet Yellen's willingness to risk to financial instability down the road by continuing easy monetary policies for immediate economic gains is an "all-in bet," former Pimco Co-CEO Mohamed El-Erian told CNBC on Tuesday.
"It's a race between financial instability caused by too much money being pushed into the wrong places versus the economy healing," El-Erian said in a "Squawk Box" interview. "For now, the market is very comforted by what Yellen is saying which is: 'I'm willing to take the trade off.'"
Yellen was pretty clear on this during a discussion with International Monetary Fund Managing Director Christine Lagarde last week, El-Erian said.
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"Congress is too dysfunctional right now" to execute on the policies needed to spur economic growth, El-Erian said. "So the Fed keeps the game going, hoping you get enough healing. And that's the big bet right now, that markets are 'all-in' as well."
The big question is whether investor resolve is starting to crack. Stocks were lower again in early trading Tuesday, continuing Monday's retreat from record highs, which saw the Dow Jones Industrial Average close above 17,000 Thursday for the first time. But concerns the Fed may increase interest rates sooner than expected following last week's strong jobs report are starting to creep into the market.
El-Erian said it's too early to get really worried because the Fed is still "very hesitant and doesn't want to move on monetary policy until its convinced that the economy has reached liftoff."