The market is focusing on comments from Federal Reserve officials on low inflation, but it is missing other signs that a rate hike could happen sooner than it expects, noted economist Mohamed El-Erian told CNBC on Tuesday.
The central bank has raised rates four times since December 2015 and has indicated it expects to hike again before the end of the year. Investors, however, aren't buying it. Traders in the fed funds futures market now don't expect the next rate hike until at least June.
"What the market hasn't listened to is the concern about financial stability that is alive and getting louder within the central bank community. Bottom line — it is repricing way too far out the next Fed hike," the chief economic advisor at Allianz said in an interview with "Closing Bell."
In a speech Tuesday, Fed Governor Lael Brainard said the central bank's long-standing assessment that continuing low inflation is the result of transitory factors that eventually will pass does not add up considering current circumstances.
Therefore, she thinks policymakers should reconsider the current path they expect for future rate hikes.
Market sell-off
Meanwhile, El-Erian wasn't surprised by Tuesday's market sell-off.
U.S. equities closed lower on Tuesday, the first trading day of the week, as jittery investors reacted to the latest tensions between North Korea and the West.
On top of that there are concerns about the debt ceiling and tax reform, as well as "wealth-destroying" hurricanes, he said.
"The question is do we get the bounce back because of the deeply conditioned buy-on-dip mentality, and I think we do," El-Erian said.
— CNBC's Jeff Cox contributed to this report.