The Federal Reserve minutes released Wednesday were more hawkish than expected, and if wages improve in the next few jobs reports, then the central bank may change its view on raising interest rates, former Pimco CEO Mohamed El-Erian told CNBC.
"With the exception of compensation, labor compensation, every indicator they look at has improved faster than they expected and … the labor market had moved noticeably closer to what's viewed as normal," he said Wednesday on "Closing Bell."
Earnings have been stagnant and wages are a big issue, El-Erian added.
However, "if labor compensation moves in the next few employment reports then there will be a change in the view of the interest rate paradigm."
The minutes from the latest Federal Open Market Committee meeting showed that some members want to make a "relatively prompt" rate hike based on the economy's progress. However, most agreed more data were needed to move up the schedule of rate hikes.
At the July meeting, the Fed reduced its monthly bond-buying program by another $10 billion and held its targeted fund rates near zero.
While the minutes struck a more hawkish tone, the ended the day near its record high. That's because "the equity market is wonderfully resilient," El-Erian said.
"The market believes that all the cash that's coming in, including from corporate balance sheets, is a better use of cash for the investor."
Mergers and acquisitions are also keeping market valuations high.
"A lot of these merger and acquisitions are not being done for offensive reasons. They're being done for defenses, to squash competition, to facilitate inversions," he said.
"This means more cash into the equity market and investors believe that's a more efficient use of corporate cash."
Looking ahead to the Fed's annual symposium in Jackson Hole, Wyoming, this week, El-Erian sees two issues on the table: how to interpret the slack in the labor market, and the question of financial instability.
There is a strong argument being made that the Fed is trying to pursue too many objectives, he said. It's an argument El-Erian agrees with.
"What it is sacrificing is financial stability. The Fed is willing to trade off immediate economic gains for financial instability down the road," he said.
—By CNBC's Michelle Fox. CNBC's Jeff Cox contributed to this report.