The Fed will 'probably break something', and more risks may need to be priced in as markets are fragile after an era of low rates and high liquidity, Mohamed El-Erian says

• The Fed will "probably break something" trying to bring down inflation, Mohamed El-Erian said.
• He pointed to the Fed's meeting minutes, which gloss over risks to market liquidity and functioning.

The Fed will "probably break something" as it scrambles to tame sky-high inflation and more risks may need to be priced in, as markets are fragile after a decade of low rates and high liquidity, Mohamed El-Erian said.

In ab interview with CNBC on Wednesday, the top economist and chief economic advisor of Allianz noted that central bankers were too late to respond to inflation. That prompted a series of aggressive Fed rate hikes this year, but its rapid pace of monetary tightening could easily bring the economy into a "damaging" recession, he warned.

"The Fed is so late, it will probably break something on the way to reducing inflation," El-Erian said. "The most likely victim is economic growth. I think the marketplace is starting to recognize that the risk of recession and what that does to earnings is an issue."

Stocks have continued to slump as the Fed shows no intention of stopping its rate hiking regime. Stocks plummeted on Thursday after the September inflation report showed prices are still accelerating, upping expectations for the Fed to keep hiking rates aggressively.

The risk of such moves by the Fed have been highlight by a range of voices in the market. JPMorgan CEO Jamie Dimon warned a recession could come in the next six to nine months and cause a 20% sell-off in stocks, and "Dr. Doom" economist Nouriel Roubini warned stocks could plunge as much as 40%.

But El-Erian thinks markets need to price in even more risk. He pointed to the September Fed meeting minutes, where central bankers stressed the tough balance between lowering inflation while sustaining economic growth, but glossed over risks to liquidity and market functioning. US bonds have been flashing signs of dysfunction as the Fed shrinks its balance sheet and drains the liquidity it once poured into the market.

The UK has seen similar turmoil set off in debt markets after the Prime Minister Liz Truss rolled out the government's mini-budget, which entails sweeping unfunded tax cuts. That prompted the Bank of England to begin emergency purchases of government bonds – had it not, it's possible a financial accident could have struck, El-Erian previously said.

"That is something that I hope we are not going to have to price in, but if the UK is telling us anything, is markets are quite fragile after such a long period of zero interest rates and massive liquidity," he warned.