El-Erian: Rally May Signal Investors Have Lowered Their Expectations

"If they stop it from getting worse and if this doesn't harm us (and lead to stagflation), it will be good," he added. "This is a trilemma. It's not just growth versus inflation. It's growth, inflation, financial stability. And somehow the Fed has to find its way through this. As does the (European Central Bank), as does the Bank of England."

El-Erian cited comments that former Fed vice chairman Roger Ferguson made earlier Monday on CNBC suggesting inflation is running too high for the central bank and predicting policymakers will keep interest rates high for a long time.

Ferguson predicted the Fed would raise interest rates another 75 basis points at its Nov. 2 meeting and another 50 to 75 basis points in December, then make one or two more hikes in early 2023.

The market was wrong to "get off to the races" and once the Fed finishes raising interest rates, "it's also going to stay there for a very long time until inflation is conquered, so I think the market is misreading the Fed's intentions even if the Fed does slow down a little bit in terms of the pace at which it's raising rates," Ferguson said.

The pivot may be back on the table in investors' minds, "but I think they're losing track of the big picture, which is inflation is still running far too high for the Fed's comfort and they're going to use their tools, primarily interest rates, to get inflation much closer to the 2% target," Ferguson added.

If he were at the Fed now, "I'd be scratching my a head a little bit as to why it is so hard to keep equity markets understanding the intention and do we have to make stronger speeches as well as take stronger actions," the former Fed official said.