El-Erian Says Monetary Policy Driven With 'Pedal To The Metal:' Fed's Credibility 'Really At Stake Here'

Allianz chief economic adviser and noted economist Mohamed El-Erian believes monetary policy has been driven with "pedal to the metal" and that policymakers didn't slow it down with time.

"And then we slammed on the brakes. And I have always said when you run monetary policy that way, you risk economic accidents, financial accidents," El-Erian told CNBC in an interview.

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The economist pointed towards the fact that core inflation is accelerating and said the Federal Reserve's credibility "is really at stake here."

"If you co-mingle the two things — financial stability and monetary policy in order to reduce inflation — you will end up in the muddled middle. And that is the problem that we have had. We have had what we regard as the financial sector capture of the monetary policy over the last few years. And that’s why we are in this mess. If we did not have this mess, they should be hiking 50 bps," El-Erian said.

On Crisis: Speaking about the ongoing banking crisis, El-Erian noted that three distinct things are being recognized in the wake of the fallout in the industry.

One is a set of bank management issues and lapses in supervision, he said, adding that both the private sector and the public sector haven’t adjusted enough to what has been a mishandled change in monetary policy regimes.

"And the third element which is the flip-flopping of the Fed most recently added interest rate volatility to a situation that already had economic and financial fluidity," the economist noted.

El-Erian explained that these three things have come together and the equity market is realizing what the bond market has realized for the last few days.

"What we saw in one or two institutions is exposing something much bigger that has to be priced-in, including that banking is changing because of what is happening right now," he said.

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