There has been a lot of talk about the impact of higher Treasury yields and the Federal Reserve. But what does it mean for the average American? Allianz Chief Economic Advisor Mohamed El-Erian says that for the average person, it means "your mortgage rate on a 30-year above 8%. It freezes the housing market even more. It means higher borrowing costs for both households and businesses, so it's not good news for the economy." El-Erian's biggest concern "is the violency of the move." "There's a fear, and I hope it's just a fear, that this could break something," El-Erian tells Yahoo Finance Live. El-Erian argues that the Fed has been too backward-looking and data-dependent and as a result, "there isn't clarity on where we're gonna be when." El-Erian sums it up saying, "this is a really hard time for the bond market and we need stability. We desperately need stability."

El-Erian, who also serves as the President of Queens College, Cambridge, has harsh for the Fed. El-Erian compares the Fed's data-dependent stance to driving a car on a curvy road while looking through the rear-view mirror. "When your tools... operate with lags it becomes a problem at points of inflections," El-Erian says, arguing that right now, the U.S. economy is at two points of inflection: a technical point and an economic point. He argues he wants "greater vision" from the Fed, saying "this is the first Fed that hasn't got a single strategic bone in it. It's all data-dependent." "If they're truly data-dependent, we're gonna get a hawkish message and the last thing... this market needs is hawkish message right now from the Fed," El-Erian tells Yahoo Finance's Julie Hyman.

El-Erian is a co-author of Permacrisis: A Plan to Fix a Fractured World. The authors argue, according to El-Erian, that there's a "sense that we stumble from crisis to crisis." El-Erian says that there are three reasons why that is happening: "the inability to generate durable, high, and inclusive growth that respects the planet," repeated policy mistakes, and the lack of global policy coordination. Though it sounds negative, El-Erian is hopeful because he believes there are concrete things that can be done to address the concerns and break the cycle.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Key video moments

00:00:55 El-Erian on the state of the bond market

00:02:48 What El-Erian wants to hear from Fed Chair Jerome Powell

00:04:15 El-Erian explains Permacrisis

00:06:40 El-Erian discusses the importance of global leadership

00:08:42 El-Erian on what the Fed could end up breaking & why it has the wrong inflation target

Video Transcript

JULIE HYMAN: We've been talking about US treasuries being on a roller coaster of sorts over the last week. We had geopolitical tensions pulling down yields as investors flocked to safe havens, but mounting fears around higher for longer rates are now driving yields to multi-year record highs. Anxious investors now awaiting guidance on the Fed's next steps from Chair Jay Powell. He's scheduled to speak at noon today.

And I'm joined now by Mohamed El-Erian, Allianz's Chief Economic Advisor to give us some more insight on what is going on out there. Mohamed, it's great to see you. I can think of no one better than to give us some perspective on this moment. And yes, there's been volatility. But as we speak this morning. We've got across the yield curve. Yields at or near 5%. What are the implications for the markets and for the economy?

MOHAMED A. EL-ERIAN: Thanks, for having me, Julie. Yes, at one point earlier this morning, the 10-year was at 498. The immediate cause, the immediate cause for the latest leg up is news that China reduced its holdings of treasuries by $21 billion in August. And that speaks to a bigger concern that people have, which is where are the buyers?

We know we're going to get a lot of issuance by the government, but who's buying? The Fed is not buying, the Fed is selling. Institutional investors, a lot of them are underwater already. The appetite to buy more here is limited. And there's been questions about China buying because of geopolitical issues.

So despite what's happening in the Middle East, yields have been going back up. As to what it means, well, for the everyday person, it means a mortgage rate on a 30-year above 8%. It freezes the housing market even more. It means higher borrowing costs for both households and businesses.

So it's not good news for the economy. But the biggest concern out there is, the violence of the move, the way we've gotten to 483 right now. And there's a fear-- and I hope it's just a fear that this could break something. And it's important because we have no anchors. Fed policy is no longer an anchor. Fed policy is too backward-looking, it's too data-dependent. So there isn't clarity on where we're going to be when.

And the economy is no longer an anchor. So this is a really hard time for the bond market. And we need stability. We desperately need stability.

JULIE HYMAN: Well, where the heck is that going to come from, Mohamed? As you say, the traditional buyers of treasuries maybe are backing off or they're at their limit, right? Even if they're still in the market here. What do you want to hear from Jay Powell today? What could he possibly say that would provide that stability?

MOHAMED A. EL-ERIAN: So what I want to hear from Jay Powell is not what we're going to hear from Jay Powell, just to be clear. What I'd like to hear from Jay Powell is that we are no longer excessively data-dependent. We recognize that you cannot drive a car that is on a curvy road looking through the back view mirror.

That is what dependency does. And when your tools, when your Fed tools operate with lags, it becomes a problem at points of inflection. And we are at two points of inflection here-- a technical point and an economic point. So what I would like to do is create a vision from the Fed as did the Yellen Fed, as did the Bernanke Fed, as did the Greenspan Fed. This is the first Fed that hasn't got a single strategic bone in it. It's all data-dependent.

And if it were data-dependent, to be clear, Julia, jobless claims, below 200,000. Certain inflation outcomes, above. Atlanta GDP for the third quarter is in the 5% range. If they are truly data-dependent, we're going to get a hawkish message. And the last thing this market needs is a hawkish message right now from the Fed.

JULIE HYMAN: The backdrop for all of this, of course-- and you're out with a book recently called "Permacrisis," which looks at how to attack some of these issues that are persistent and consistent in the world. And I'm reminded of what Jamie Dimon said last week. That this is one of the most dangerous times in the world in decades.

He was talking about the geopolitical picture, he was talking about quantitative tightening. Do you agree here? Are we seeing this confluence of events? And are risks rising even at this level?

MOHAMED A. EL-ERIAN: So he was referring, in large part, to geopolitical risk, and the tragic events of the Middle East and the continued death of innocent civilians is of concern, because it inflames feelings. And it makes outcomes even less predictable. But if you step back away from this horrific period right now in the Middle East, but if you step back, we've had this notion of what the G20 has called cascading crisis or where my co-authors and I call permacrisis.

The sense that we stumble from crisis to crisis. And we believe there are three reasons for this. One is the inability to generate durable high and inclusive growth that respects the planet. Two is repeated policy mistakes. And sometimes, the same policy mistakes being made over and over again. And three, is a lack of global policy coordination. So when you have these three things, you will end up with unusual uncertainty, you will end up with fluidity, you will run down your human resilience and your financial resilience. That's the bad news.

The good news is that there are ways, concrete ways to address all three that can get us out of this permacrisis, that can put us on a road of virtuous cycles, not vicious ones. But it's not going to happen in the next one or two years. This is more a 2 plus year outlook, but it is a hopeful book. Because we believe that you can address all three of these issues.

JULIE HYMAN: Now, I know your co-author Gordon Brown is more the politician of the group, so to speak. But I am curious. One of the things you talk about is global leadership as being one of the solutions here. And I look at a moment, at least here in the US where the House of Representatives can't even elect a Speaker, right? So are we going to get that global leadership? You know, you say it's an optimistic book. Are you optimistic on that point, in particular?

MOHAMED A. EL-ERIAN: And that has been sort of an issue of heated discussion among the authors. And to be clear, this was born of Zoom calls. During the lockdown, three of us-- Gordon Brown, Mike Spence-- Nobel Prize winning economics, and I would get together on a regular basis to talk about the world. And it was very frustrating because we were worried. You know, we kept on hearing notions of, oh, when we open up the economy after this lockdown, everything is going to be fine. And we said, that's not how economies work.

It's not a light switch that you simply put it on and everything comes on. When you reopen an economy, things are in the wrong place. Then we kept on hearing about how bad the vaccine distribution was. And we kept on saying, be careful because we could get a variant from South Africa. We could get a variant from India.

And then we pivoted, when we became more hopeful, when we sort of understood what was at the core of all this. The lack of political leadership is an issue. Yes. But if you look-- and the book covers the history of liberal democracies, is that you end up getting to the right leadership.

Is hard, it doesn't happen as quickly as we'd all like to, because at the end of the day, the people-- the citizens need it. They want it. And there was a lot of concern right now about inequality, about climate, change, about what's happening around the world. So people are looking for leadership. And the hope is that we will get there. We will iterate to that.

JULIE HYMAN: Let's bring it back to the leadership at the Fed and the role that they are playing in some of these global issues. Housing affordability, of course, is a big topic as well. We've talked consistently about this notion that the Fed could break something. We saw a little whisper of it earlier in the year with some of the banks. Where do you see the highest likelihood of something breaking now?

MOHAMED A. EL-ERIAN: The reason why we can break something is that if you get your initial call wrong on inflation, you lose valuable time. And if you lose valuable time, you end up doing what the Fed had to do, which is play massive catch up. Scramble to play catch up, which means you end up with the most concentrated cycle. And it's not well timed.

So this most concentrated cycle has happened at a time when we also have a fiscal issue, we also have a run down in savings of households. And the average person right now is not only facing interest rate risk, meaning that they have debts that are being refinanced at much higher rates-- whether they are in a household, a business or government. The interest rate bills are going to go sky high.

But also, the outlook for the economy weakens, which means income becomes an issue. For the marketplace, it means not only do we have to worry about interest rate risk, but we have to worry about credit risk and liquidity risk. So that is the problem with being late. You cannot catch up easily without the risk of something breaking. And that's where we are today.

In addition to that, there are genuine questions, Julie, about critical inputs into monetary policy. Economists disagree. What is the equilibrium interest rate? What is all stock? Economists disagree how much of the lagged effect of the hikes have we already felt? No one is quite sure what the impact of quantitative tightening, reducing the balance sheet is going to be.

And on top of that all that, we have the wrong monetary framework. And in my opinion, most economists agree on everything I've said. There is some disagreement on what about to say. We have the wrong inflation target. So even if you abstract from all the problems, the deep hole that the Fed dug itself into, we have these genuine uncertainties about monetary policy going forward.

JULIE HYMAN: Oh. Deep breaths after that one, Mohamed. Well, we'll see what Jay Powell has to say today. I suspect he's not going to be changing his inflation target. Mohamed El-Erian, it's always great to speak with you. Thanks so much. Mohamed, President of Queens College at Cambridge and Chief Economic Advisor at Allianz. Thanks again.

MOHAMED A. EL-ERIAN: Thank you.