The Fed isn't navigating 'just any rate hike cycle' and reducing its balance sheet will have a massive impact, top economist Mohamed El-Erian says

• The Federal Reserve is attempting to reduce its balance sheet while also hiking interest rates, and that could cause problems, says Mohamed El-Erian.
• The simultaneous moves could stir massive economic disruption, according to the top economist.

The Federal Reserve is attempting to reduce its balance sheet while concurrently hiking interest rates, and it's going to cause major disruptions in the market, according to top economist Mohamed El-Erian.

"A definitive plan has not been announced yet, and even when such a plan is in place, changes could be made in the size, pace and the balance between passive (maturities) and active (sales) runoffs," El-Erian wrote in a Bloomberg opinion column Friday. "And the fallout of such a plan is complicated by the fact that the Fed will be raising interest rates simultaneously."

Wall Street analysts have been raising their predictions for policy tightening to include multiple 50-basis-point rate hikes, El-Erian pointed out, and the Fed is already lagging behind the curve on inflation.

"This is not just any rate-hiking cycle," warned the president of Queens' College at Cambridge and chief economic adviser at Allianz.

The economy has grown too accustomed to easy-money conditions, and if the Fed makes a policy error, the US could sink into a recession, he added, echoing previous warnings.

Investors holding the securities that the Fed intends to shed will adapt their behavior, which could have a pronounced impact on market pricing, El-Erian said.

Additionally, it remains unclear, he pointed out, how yield volatility will impact markets.

"The reduction in the Fed's balance sheet is likely to be consequential, the broad contours of where the effects will be felt are clear, but the specific magnitude and timing are impossible to pin down now with a high degree of certainty," El-Erian wrote.