Even though the Federal Reserve has opened the discussion about what to do with its nearly $4.5 trillion balance sheet at the same time as increasing interest rates, politics rank as the top risk for financial markets, Allianz's chief economic advisor, Mohamed El-Erian, told CNBC on Monday.

"The biggest wild card is the politics. It's really important here, Europe, Middle East, North Korea. There's a lot of moving pieces," the former Pimco co-CEO said in a "Squawk Box" interview. "The second-biggest wild card is the reaction of the economy to years and years of low, noninclusive growth."

Maneuvering by President Donald Trump and Republican leaders on Capitol Hill holds the key to whether promised pro-growth policies, such as tax cuts and deregulation, become reality and help boost the economy or fall short and hurt the economy, El-Erian said.

"The critical thing for investors to realize is it's become much more binary," he said. "The new normal is becoming the least likely outcome in the next two years. We're going to pivot one way or another."

After the financial crisis, El-Erian at Pimco coined "the new normal" to describe a low economic growth environment with high unemployment and government debt problems.

Trying to boost growth and reduce unemployment, the Fed's accommodative monetary policy since the crisis and how long it might last has been the obsession of markets in recent years.

But now that the Fed has a few rate hikes under its belt, the most recent move at the March policy meeting, and expectations for a total of three in 2017, the central bank has become less of a risk, El-Erian said.