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El-Erian commends Trump's economic picks, says plan to ramp up debt has potential to work

There is room for a debt-financed expansion of the U.S. economy under President-elect Donald Trump, especially if his increased fiscal spend is allotted towards promoting economic growth, renowned investor Mohamed El-Erian has told CNBC.

Allianz's chief economic adviser and the current chair of President Barack Obama's Global Development Council said Trump's plan to boost fiscal spend through a ramp-up in debt has the potential to work if executed correctly.

"Debt sustainability is a ratio. Yes there is debt and debt service up here but below is the ability to grow the economy, the ability to generate income," El-Erian explained to CNBC Wednesday on the outskirts of the Arab Strategy Forum in Dubai.

"The hope is that through infrastructure spending you actually increase the growth rate and increase income," he added.

'Encouraging' nomination picks

He also sounded an encouraging note about his view of the people he knows who have so far been nominated by the President-elect.

"The ones that I am familiar with are from the economic team and it is an impressive appointment so far. He has gone to people who understand the problem of low growth, he's gone to people who have experience and he's gone to people who understand they need to surround themselves with people who know how governments actually work. So far it is encouraging but a lot will depend on detailed design implementation," he said.

Turning to the buoyant response of U.S. equities in the weeks since the U.S. election in early November, El-Erian explained why he believed the market was approaching the incoming administration with such enthusiasm.

"What has been affected by Mr Trump's announcements is the market and particularly the trifecta of higher growth, higher inflation and more money coming into the stock market because of repatriation. Expectations of these three things have been pushing the market," he posited.

"Part of what has been driving this improved sentiment is that the pro-growth elements of his policies are the ones that have got a lot of attention from him and his team and the other ones that people have been worried about have hardly been mentioned," he concluded.

Two hikes next year?

With regards to the current focus on the Federal Reserve, El-Erian agrees with market consensus that we should expect a 25 basis point rise to be announced Wednesday. However, he added that the more interesting takeaway will be regarding the Fed's dot chart which includes a dot for each of the committee's members at their target interest rate level for each time period.

"I think what we are going to see for the first time is that the blue dots are not going to migrate down, the blue dots are going to be relatively stable, it's market expectations that are going to be migrating up," he opined.

"That means the Fed is going to be signaling at least two hikes next year."