Crypto and gold prices will go higher if the Fed is forced to raise its inflation target to 3%, says Mohamed El-Erian

• Gold and crypto prices would pop if the Federal Reserve were to raise its inflation target to 3%, economist Mohamed El-Erian told CNBC on Monday.
• A higher target would give the Fed some breathing room as it works to bring down inflation from a 41-year high.

Gold and cryptocurrency prices would increase if the Federal Reserve were to lift its inflation target as it engages in a prolonged fight to bring down consumer prices, economist Mohamed El-Erian told CNBC on Monday.

"They both go higher in a world like that," he said, referring to the prospect of the Fed bumping up its long-term inflation target to 3%.

The Fed's current inflation target is 2%. The Allianz adviser sees prices traveling up for the asset classes that are generally seen as inflation hedges – at least on the day of such an announcement from the US central bank.

"What will force them to change their target is the recognition that by being so late, they can't get to that target and their credibility is threatened," said El-Erian. "They will also worry that by hitting the brakes too hard, they may push this economy not just into a short-term recession but into a longer-term recession."

The Federal Reserve, led by Jerome Powell, is racing to arrest the jump in consumer prices ranging from gas to food to shelter. Inflation in March accelerated 8.5% year-over-year, the fastest increase since December 1981.

The Federal Open Market Committee in March launched its interest rate-hike cycle by raising the fed funds rate 25 basis points from a range of 0% to 0.25%. It's also drawing down asset purchases to shrink its balance sheet.

Meanwhile, gold prices have risen about 9% so far this year, trading at $1,992 per ounce on Monday. In contrast, bitcoin has dropped around 16% to $39,178 and altcoin ether has lost 21% to trade at $2,909.

"The concern for the crypto people is that this decline is happening at a time when gold is up and hitting almost $2,000," he said. "The big argument for crypto is it's a diversifier — at a time of inflation, it is attractive."

But crypto hasn't played that role recently, he said. "And that's because crypto, unlike gold, benefited enormously from all the liquidity injections. So what you're getting in crypto is this tug of war between a recognition that liquidity is going out from the system as a whole and attractiveness as a diversifier," he said. "And so far it is the liquidity element that's winning out."