rising interest rates have made only a modest dent in inflation so far and may need to go considerably higher according to morgan stanley declining gasoline prices have helped keep a lid on topline inflation over the past two months but that trend has masked costofliving increases that have spread to other areas  for instance food prices in the consumer price index have risen 19 over the past two months while shelter costs which make up about onethird of cpi are up 12 in the same period headline inflation including food and energy prices is still 83 higher year over year  while core inflation excluding food and energy has risen 63 including a much higher than expected 06 monthly gain in august the inability to tame inflation on a broad level could make fed policymakers impatient and also drive up longerterm interest rates ellen zentner morgan stanleys chief us economist said in a client note dated friday the real economy may simply be less sensitive to higher rates today which means the level of interest rates needed to slow the economy is also likely to be higher zentner said getting there quickly can be costly markets expect the fed on wednesday to enact a third consecutive 075 percentage point rate increase and another hike of that size when it next meets in november with pricing leaning toward a halfpoint move in december according to the cme group current market pricing in fed funds futures indicates that the feds terminal rate or the point where it stops hiking will hit 439 in april 2023 the fed targets its benchmark rates in quarterpoint ranges so thats consistent with a terminal rate of 42545 according to the ratesetting federal open market committees projections in june the terminal rate was expected to rise to 38 in 2023 meaning that current market pricing is about half a percentage point ahead of that outlook but zentner thinks the fed could have to go even further to tackle inflation the cleveland feds measure of sticky price inflation of goods whose prices generally dont fluctuate a lot continues to rise up 61 in august on a 12month basis and 77 on a onemonth annualized basis nor is zentner alone in that sentiment citigroup economist andrew hollenhorst also sees upside risk to the funds rate despite the dramatic upward revisions to policy rate projections risks remain skewed to the upside it is much easier to see scenarios where policy rates reach above 5 than where the cycle terminates below 4 he said in a note dated sunday the funds rate hasnt been above 5 since august 2007 according to fed data in fact those expectations for higher rates are causing wall street economists to rethink their projections for growth nearterm zentner cut her thirdquarter gdp outlook to 08 from 1 that dovetails with the atlanta feds gdpnow tracker  which in its latest update last week is now pointing to just 05 growth in q3 goldman sachs also has raised its expectations for rate hikes this year though it still sees a terminal rate in the 4425 range the bank however cut its gdp outlook for 2023 to 11 from 15 as long as the jobs market remains strong and the economy avoids slipping into a deep recession the fed is likely to keep raising rates until it sees real progress on inflation zentner said thus far higher rates have inflicted little widespread pain on the real economy so the fed has room to continue hiking into restrictive territory the morgan stanley economist said bottom line is that the fed needs more evidence that its actions are taking a bite out of the real economy