BlackRock says there's a good chance the Fed will have to hike interest rates to 6%, the highest level in 20 years

• There's a reasonable chance the Fed will hike interest rates to 6% and keep them there, a BlackRock CIO said.
• Sticky inflation and a strong labor market are factors pushing the Fed to keep hiking, Rick Rieder said.

Inflation is stubbornly higher than the Federal Reserve wants, and that means it could push interest rates to a 20-year high of 6% — and not just for short while, according to a BlackRock investment chief.

Rick Rieder, CIO of global fixed income at the world's biggest asset manager, pointed to the US economy's resilience in the face of the Fed's aggressive rate hikes. The surprisingly strong jobs market in January was one sign of its strength.

"In the end, with the payroll strength we've witnessed and the stickiness of inflation, we think there's a reasonable chance that the Fed will have to bring the Fed Funds rate to 6%, and then keep it there for an extended period to slow the economy and get inflation down to near 2%," Rieder said in a Tuesday note.

His remarks came after Jerome Powell's testimony to Congress on Tuesday, where the Fed chair signaled the central bank was ready to ramp up the pace of rate hikes. That raised expectations for a 50-basis-point increase in March, which helped drive a selloff in stocks.

The Fed has lifted rates from near zero last March to as much as 4.75% today, in a bid to bring inflation down to its target 2% rate. Inflation hit a 40-year high of 9.1% in June, and was still far above target at 6.4% in January.

Some key areas that had led inflation lower in recent months were stubbornly strong in January, Rieder noted, and recent readings have shown strong momentum in the rate.

"So, while we're quite confident that last year's elevated inflation peak won't be exceeded, the possibility of inflation remaining stickier for longer does suggest that the Fed will have to keep hiking rates for longer than previously thought," he said.

"With the strength recently witnessed in the labor market data, in various inflation measures and in economic growth readings more generally, this resolve by policy makers would seem to be not only required, but critical to returning inflation to more normal levels," he added.

US businesses added far more jobs than expected last month, coming in at 517,000 compared with the forecast for 185,000. The unemployment rate came in below estimates, too.

"While the resilience of the U.S. economy places the Fed in a more challenged position in terms of policy decision making, and may add to the uncertainty in markets, it's not surprising in and of itself," Rieder said.

"Today's economy is no longer as interest-rate sensitive as that of past decades, and its resilience, while a virtue, does complicate matters for the Fed," he added.