Central banks around the world are becoming less influential "in terms of delivering economic outcomes," according to Mohamed El-Erian, chief economic advisor at Allianz.
"In the case of the Bank of Japan, they are becoming ineffective, if not counterproductive. But that doesn't mean that the Fed is not relevant. The Fed is tremendously relevant for markets, for the political system. They are just less effective," El-Erian said Thursday on CNBC's "Closing Bell."
This puts Federal Reserve Chair Janet Yellen is in a tough spot, he said. Yellen is scheduled to speak Friday morning in Jackson Hole, Wyoming, and economists are waiting to dissect her comments looking for hints as to the timing of the next interest rate hike.
While some central bankers have used the event as a means to signal policy changes, Yellen's "inclination is to downplay Jackson Hole" but she is "being pushed to make a major policy statement," El-Erian said. He explained that despite market wishes for some sort of signal, that isn't very likely.
"There isn't much she can say," El-Erian said.
Contrary to recent comments made by San Francisco Federal Reserve Bank President John Williams, El-Erian also said he doesn't believe increasing the inflation target is an appropriate solution. Last week, Williams floated the idea of raising the U.S. central bank's 2 percent inflation target.
"They can't even reach the current inflation target. The truth is it's up to other government agencies to step up to the plate," El-Erian said. "The Fed has been the only game in town for too long and if it continues like this the collateral damage could be quite large."
El-Erian said, however, investors have done very well in the current environment as "central banks have repressed financial volatility, pushed up virtually every asset price and therefore delivered returns from the future to investors today."
He said that relative valuation is the key to the market because "absolute valuations are artificially high."
"So remain very tactical, very agile and realize that we have been decoupled from fundamentals. There are possibilities for major air pockets ahead," El-Erian said.
— CNBC's Silvana Henao contributed to this report.