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Fed should get rate hike over and done with, Mohamed El-Erian says

El-Erian: Central banks cannot be only game in town

The Federal Reserve should get its interest rate rise "over and done with" and reassert that this will not be a normal rate hike cycle, widely followed economist Mohamed El-Erian told CNBC on Tuesday.

That's because "ultra-low rates have distorted the system [and] have encouraged too much risk-taking," the chief economic advisor at Allianz said in an interview with "Closing Bell."

However, the central bank needs to "reassure markets that the path is going to be very, very shallow going forward and reassure markets that this cycle is going to end well below the terminal values historically."

The Fed's policymaking committee meets next week and could possibly raise rates. However, the market hasn't been pricing in a rate increase.

Several noted market experts have been warning about the impact of the central bank's actions on the market. At the Delivering Alpha conference presented by CNBC and Institutional Investor on Tuesday, Paul Singer of Elliott Management faulted the Fed and others for creating unusual dangers and a "tremendous increase in hidden risk."

El-Erian said the Fed has been pushed into a corner.

"Because others haven't stepped up to their responsibilities, central banks have had to do too much for too long," he said.

"Central banks cannot be the only game in town. They cannot compensate for other policymakers. There are much better tools on the fiscal side and on the structural reform side that are much better suited for what's needed."

Meanwhile, the fact there has been so much "obsessing" over a quarter-point rate hike is "absolutely absurd," he added.

However, El-Erian said it shows the extent to which the markets have relied on the injections of liquidity — which have delivered the "perfect trifecta" of higher returns, lower volatility and correlations where everything goes up.

"We've become so sensitive to these tiny moves because we are overdependent on the Fed," he said.

— CNBC's Jeff Cox contributed to this report.