Economic growth is not coming fast enough to the justify the artificially high asset prices created by the Fed's massive bond-buying program, Pimco's Mohamed El-Erian told CNBC on Tuesday.
"That's why you're getting this incredible volatility. And that's why market liquidity is declining because people are stepping back to see greater clarity on both sides," the investment management company's CEO and co-CIO told "Squawk Box."
In May, "interest rate risk, credit risk, foreign exchange risk, volatility risk—whatever you name—came under attack," he noted, and predicted that "there will be some cascading down to equities."
"Reduce your equity risk, your liquidity risk, your credit risk. Those are the three to reduce," he added.
"Pull back from surfing this wave of central bank liquidity," he continued. "Walk away from risk, don't sprint away."
Concern has crept into the market recently that the Fed might taper its $85 billion a month quantitative easing.
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"QE is a medication that comes with a warning, which says: 'Do not use it for a long time because you'll get side effects," El-Erian said.
"We've been using it for a very long time," he continued. "So we're getting side effects, but we don't know what to replace it with, because [economic] growth is not materializing."
There's a huge disconnect between asset prices and fundamentals, he said. "That's OK as long as fundamentals validate these prices. But if they don't, the Fed is going to have to do even more … or prices are going to have to come down."
Friday's jobs report will help show whether the economy is ready for the training wheels to come off, El-Erian said. "We need the next three and four [jobs reports] to average well above 175,000 [new nonfarm payrolls].
"That's going to be a signal that we're getting close to escape velocity," he added, "and we can effect this hand-off of assisted growth to genuine growth."