Mohamed El-Erian, chief economic adviser at Allianz, has told CNBC that investors should prepare for a U.S. rate hike this summer, but added that the Federal Reserve will cushion the blow with "very aggressive forward guidance policy".
When the Fed eventually does start lifting rates from their current record lows, they will stop "well below" historical averages of 4 percent, the former co-CEO Pimco told CNBC at the Global Financial Markets Forum in Abu Dhabi.
"My own impression is that we will get a rate hike this summer, by September, not in September," he said.
This will be accompanied by "very aggressive forward policy guidance, which tells us it's a long journey, so markets don't go to the terminal late. We want to focus on a very gradual journey," he said.
On Friday, Federal Reserve vice chairman Stanley Fischer said the central bank looked most likely to raise interest rates in June or September, but developments in the economy could alter the timing.
"I don't think there is an emphasis on June instead of September" Fischer said, at a monetary policy forum in New York, adding that he doesn't expect the U.S. central bank to follow any sort of predetermined path when rates do begin to rise.
Speaking on valuations, El-Erian said short-term investors should look to move out of the U.S. and into Europe as there is still room to go. The dollar will also strengthen further, he said.
"The dollar has further to go, but it won't be linear. The thing that investors should value most is liquidity, the ability to reposition…. don't give up liquidity. These markets are structurally no longer constructed to provide liquidity," he added