Investors are paying the paying the price for the Federal Reserve's policy mistakes, according to Allianz economic advisor Mohamed El-Erian. "This is a two-part policy mistake of historical proportions," the former CEO of bond giant Pimco told CNBC's " Squawk Box " in a Monday interview. "Part No. 1 was being seduced by 'transitory' and doing nothing," he added, referring to the term Fed officials used to describe inflation through much of 2021. "Even in March, they were still buying bonds, just to tell you the magnitude of how far behind they fell. And now in the scramble to catch up, they are hiking aggressively into a strong economy, which will be phase two of the policy mistake." El-Erian spoke less than a week after the rate-setting Federal Open Market Committee approved its third consecutive 0.75 percentage point interest rate increase. The cumulative 3 percentage points in hikes his year represents the fastest pace of tightening since the Fed began using the overnight funds rate as its primary policy tool in 1990. In addition to raising rates, the Fed is paring up to $95 billion a month in bond holdings from its $8.9 trillion balance sheet. The central bank is unlikely to veer from the present course, El-Erian said. "The trouble is, the alternative is not something that will appeal to them," he said. "So we are going to have to navigate through this historical Fed policy mistake." There is one bright side to the analysis: The process will help wash out distortions in financial markets that also were the product of Fed policies in the other direction. At the onset of the Covid pandemic , the central bank slashed benchmark borrowing rates to near-zero and instituted a series of unprecedented liquidity and lending measures that helped stave off the initial crisis but that also one day would have to be unwound. "We were in a very artificial market [with] highly distorted asset allocations. There was no meaningful risk mitigators, and people were pushed to do silly things, and we are unwinding this," El-Erian said. "For long-term investors, we are going to get to a better destination. The journey, though, is incredibly bumpy and getting even more bumpy with what is happening around the world."