The Federal Reserve risks ruining its own reputation if its monetary policies fail amid the rising inflation, according to Mohamed El-Erian.

The famous economist warned that the US central bank's sluggish response to red-hot inflation could cause "collateral damage" to its own credibility.

"What I'm most worried about is the collateral damage that's gonna be associated with inflation coming down because the Fed has been so late in responding," El-Erian told Yahoo! Finance Sunday. 

El-Erian's warning came amid soaring inflation at a 41-year high of 9.1%. The Fed hiked interest rates by 75 basis points in both June and July to try to curb prices, but Chair Jerome Powell has since indicated that policymakers will take a data-driven approach to decision-making.

Former PIMCO chief executive El-Erian said the Fed should remain hawkish to rebuild its credibility after low-interest rates and favorable monetary policy helped to fuel a stock market bubble in 2021.

"We've got to get control of the inflation beast," he said. "The Fed needs to act not only in tightening its monetary policy, but also in gaining credibility. Its forward guidance right now is almost meaningless — and that's not a good thing."

El-Erian expects that higher interest rates will lead to inflation falling by the end of this year but forecasts that the US Consumer Price Index will blast above the Fed's 2% target. The July update on PCI is due Wednesday.

"[Inflation] will come down by the end of the year, but it will remain sticky," El-Erian said. "I'm looking for a core CPI in the 4.5% to 5.5% range, so well above the 2% target of the Fed."

"The core number is going to stay stubbornly high," he added. "That just speaks to an inflation process that has become more entrenched and has become more broad-based in our economy."