Mohamed El-Erian says the stock market won't react to tapering speculation until the Fed's 'Big 3' starts to take it more seriously

• Economist Mohamed El-Erian said the market has not reacted to tapering speculation because the Federal Reserve's "Big Three" hasn't directly discussed it.
• El-Erian was referring to Fed Chair Jerome Powell, Fed Vice Chair Richard Clarida, and Fed New York CEO John Williams.
• "The market is still conditioned by the notion that the Fed ... will not taper," he told CNBC.

Despite speculation that the Federal Reserve may tighten its monetary policies sooner than expected amid a robust economic rebound in the past months, the market has not reacted simply because the "Big Three" hasn't spoken, according to Mohamed El-Erian on Monday.

"This migration to 'let's get going' is from below," El-Erian told CNBC Monday, referring to various Fed officials who have weighed in on the central bank's asset purchases. "So as long as the 'Big Three' aren't saying it, the market is not going to be listening to anything else."

El-Erian was referring to Fed Chair Jerome Powell, Fed Vice Chair Richard Clarida, and Fed New York CEO John Williams.

"The market is still conditioned by the notion that the Fed ... will not taper," he told CNBC. "Why? Because it has been so influenced by what happened in 2013 the taper tantrum, from what happened in the fourth quarter of 2018 when the Fed was forced into a very embarrassing U-turn."

The 2013 taper tantrum was when collective panic prompted US Treasury yields to spike while the 2018 reversal was when the Fed signaled several rate hikes for that year then slashed them to none.

The Allianz and Gramercy advisor has for months been reiterating that he thinks the Fed should have tapered already given the inflationary setup.

Still, El-Erian thinks little to no direction will be offered during the high-profile annual Jackson Hole conference of central bankers from August 26 to 28. As for the Federal Open Market Committee meeting on September 22, he is a bit more hopeful.

"I think it's really important for the chair to regain control of the narrative, otherwise he's going to have a very split FOMC," he said.

El-Erian, who is also the president of Queens' College, Cambridge University, did add that once the Fed does taper assets, he thinks the market will not collapse.

"You will get some pullback, and you should, because we are at bubblish levels in certain places because of this massive liquidity, but I don't think this is a collapsed situation," he told CNBC. "This is a 'let's get more sober' situation."

El-Erian then discussed the two biggest risks he sees in the market right now: a big policy mistake for "not doing anything" or a market accident due to excess liquidity.

"If you look at really what the big risk to the economies are it is if they do not taper because then you increase tremendously ... the high likelihood of this policy mistake or market accident," he said.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.