Mohamed El-Erian: US is 'much more vulnerable' to a policy mistake by the Fed

  • There is a greater chance of a Federal Reserve mistake these days, says Allianz's Mohamed El-Erian.
  • That's why it would have been better for the Fed to start raising rates earlier, he says.
  • He's bullish on the U.S. economy but is concerned the rest of the world "will drag us down."

There is a greater chance of the Federal Reserve making a mistake these days, noted economist Mohamed El-Erian told CNBC on Tuesday.

"There's no doubt in my mind we are more vulnerable," to a "policy mistake" by the Federal Reserve and a "market accident," the chief economic advisor at Allianz said on "Closing Bell."

"That's why it would have been better to start the normalization earlier, but it didn't come."

El-Erian, former co-CEO of Pimco, had long argued that the Fed should raise rates before it decided to do so. In August 2015, he told CNBC that the central bank had already missed a good opportunity to raise rates. The Fed ultimately instituted its first hike since 2006 in December 2015.

The recent market sell-off has heightened concerns over the path of rate increases. If rates rise too quickly, it could hurt the economy and, in some cases, cause a recession.

Some prominent market watchers, including Wharton School finance professor Jeremy Siegel, believe the Fed will slow down its pace next year. The central bank is expected to raise rates in December and three more times in 2019.

El-Erian attributes the "bumpy" market to the "long overdue transition" from ample liquidity, provided by the Fed, to a more "uncertain liquidity regime." He believes long term it is good for the health of the market.

Right now, the key issue is the strength of the United States economy — overall and in relation to other nations, he said. He's still bullish on U.S. economic growth, but he pointed out that other nations are lagging in terms of pro-growth policies.

"The biggest concern I have is that the rest of the world will drag us down," said El-Erian.

He's specifically concerned about China and Europe. China is going back to an old growth model with its economic policy, which is less potent and "like cranking up a machine that's getting exhausted," he said.

And Europe needs to sort out political issues in Italy, German and with Brexit so it can focus on economic issues, he added.

In the end, "look at the strength of the U.S. economy and hope that other countries get their act together when it comes to policies, which isn't the case as yet."

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