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Mohamed El-Erian said Monday the market is still underestimating the chances the Federal Reserve will raise interest rates this summer.
The Fed has become part of the problem and "shouldn't be doing what they're doing, but exiting is quite hard. Now, they have a small window — a small window — to start normalizing, and I think they intend to take advantage of it," Allianz's chief economic adviser told CNBC's "Squawk Box."
Minutes from the Fed's April meeting revealed policymakers intend to raise interest rates as soon as June if second-quarter economic growth picks up, the labor market continues to improve and inflation remains on track to hit the Fed's 2-percent target.
El-Erian said the Fed would definitely move by September, and probably by July. Britain's referendum over its European Union membership, which comes one week after the Fed's June meeting, presents a large enough risk to keep policymakers on hold next month, he added.
Expectations for higher rates have ticked up since the release of the minutes, according to the CME's FedWatch tool. Investors now put the chances of a June hike at 26 percent and a 53 percent likelihood of a July move.
"The market is not fully priced for July, and the market is not priced for the possibility of a second hike coming later in the year," El-Erian said.
The Fed missed the chance to raise rates at this time last year, El-Erian said. But he said the Fed can learn from its mistakes, although markets don't always believe it can.
In an interview published this weekend, Boston Fed President Eric Rosengren told the Financial Times the United States is close to fulfilling the Fed's requirements to raise interest rates. The voting member of the Fed's policymaking committee said he is preparing to back a rate hike in light of positive financial and economic indicators.
On Monday, St. Louis Fed President James Bullard, also a voter, said tightening labor markets may increase inflation, bolstering the case for a rate hike.
El-Erian said Fed Chair Janet Yellen probably could not walk back expectations for a summer rate hike at this point.
"I don't think it's possible, and I don't even think she wants to. I think the Fed is in a concerted effort to talk up expectations of a rate hike this summer," he said.
El-Erian said he expects the Fed to raise rates twice this year and possibly once or twice next year.