BlackRock Says the Federal Reserve Could Hike Interest Rates to a Peak of 6%

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  • "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" BlackRock's Rick Rieder wrote.
  • The probability of a half-point hike moved to 73.5% on Asia's Wednesday afternoon, according to the CME Group's FedWatch tracker of fed funds futures bets.

The world's largest asset manager sees the U.S. federal funds rate peaking at 6% after Fed Chair Jerome Powell warned interest rates are likely to head higher than the central bank previously expected.

"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%," BlackRock's chief investment officer of global fixed income Rick Rieder wrote in response to Powell's testimony before the Senate Banking Committee on Tuesday.

The economy is more resilient than expected, Rieder said, pointing to the most recent jobs report and consumer price index reading.

"This is partly due to the fact that 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 wrote in the note.

BlackRock's call for a terminal rate of 6% comes as Morgan Stanley economists said Powell's commentary opened the door to resume to larger hikes of 50 basis points.

In February, the central bank raised rates by 25 basis points, bringing the federal funds rate to a range of 4.50% to 4.75%.

The probability of a half-point hike moved to 73.5% in Asia's Wednesday afternoon, according to the CME Group's FedWatch tracker of fed funds futures bets. A 50 basis point hike would bring the rate to a range of 5% to 5.25%.

The Federal Reserve is slated to meet on March 21-22.

Emphasizing the U.S. economy's resilience, Rieder compared it to polyurethane, a durable material described by the American Chemistry Council as "flexible foam."

"We've recently likened the U.S. economy to polyurethane, which is a remarkable material that displays flexibility and adaptability, but also durability and strength," he wrote in the note.

"The material's ability to be stretched, bent, stressed and flexed without breaking, while in fact returning to its original condition, is what makes it so chemically unique," he said.

In its latest report, the U.S. reported an increase of 517,000 nonfarm payrolls in January, significantly exceeding market estimates, while the unemployment rate fell to 3.4%, the lowest level since May 1969.

The next report is expected Friday and is likely to continue to show a resilient labor market despite the Fed's aggressive rate hikes to tame inflation. Economists surveyed by Dow Jones estimate 225,000 jobs were added last month.

– CNBC's Patti Domm and Jeff Cox contributed to this report.

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