Investors should take some chips off the table as the US could see either stagflation or a recession soon, says top economist Mohamed El-Erian

• Investors should think about pulling back from the market as stagflation looks likely, Mohamed El-Erian said.
• "Everyone now acknowledges that our baseline is stagflation," he noted.

Investors should consider pulling back from markets before stagflation sets it or a recession hits as the Federal Reserve struggles to guide the economy to a soft landing while tightening monetary policy, Mohamed El-Erian said.

"Everyone now acknowledges that our baseline is stagflation, and our balance of risk is tilted more toward recession than it is toward high growth and low inflation," El-Erian told CNBC Wednesday.

The Fed, he explained, was incredibly slow to respond to inflation, and they mischaracterized it from the start. Then, the Fed's mistake was exacerbated by war in Ukraine, a lack of foresight for an energy transition, and supply-side issues within the economy.

But ultimately, the president of Queen's college said, the Fed's oversupply of liquidity during the pandemic was the key mistake.

"I think it's really hard to take the punch bowl away, it just comes back to that," El-Erian said. "The Fed hasn't been late in terms of pumping liquidity, in fact it overstayed its welcome. But when it comes to making the difficult decision, this Fed in particular has been incredibly slow, and it has been incredibly slow in acknowledging its mistake."

He noted that the European Central Bank has acknowledged and explained its characterization of inflation, though the Fed has not done so.

El-Erian continued: "We still don't have an explanation from the Fed as to how they've improved the understanding of inflation."

The markets, however, have taken inflation data better than they might've otherwise, he said, because of all the additional liquidity. Even so, however, investors should remain cautious moving forward.

"If I were fully invested right now I would take some chips off the table," El-Erian said. "I would wait for more value to be created."