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Mohamed El-Erian: Fed's persistent inaction risks financial market instability

El-Erian: Financial instability risk increasing

The Federal Reserve needs to start worrying more about the ill-effects down the road of "artificial, ultra-low" interest rates, rather than what a small hike might mean for the economy, Allianz's chief economic adviser, Mohamed El-Erian, told CNBC on Monday.

"I would have hiked [rates] in September," the former co-CEO of Pimco said on "Squawk Box," referring to the Fed's decision not to increase the cost of borrowing money for the second time in the past decade. "I [also] think they missed a window last year. I would normalize."

If only looking at the economic numbers, El-Erian admits that a rate increase could be a close call, considering the relatively mixed data recently, including Friday's weaker-than-expected government employment report for last month.

But he said concern about the risks to the financial system should put central bankers over the top.

"The risk of financial instability down the road is getting higher and higher. And the longer we stay at these artificial, ultra-low rates the more we fuel financial instability down the road," he said.

El-Erian said he was heartened by three Fed officials recently warning about the threats of low rates, which inflate asset prices and push investors into higher riskier vehicles in search of yield, on the financial markets.

While the Fed's next two-day meeting concludes six days before the November election, the market puts greater odds, nearly a 75 percent chance as of Monday, on a rate hike at December's gathering.

The Fed raised rates in December 2015 for the first time in more than nine years.

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