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 top-line inflation over the past two months. But that trend has masked cost-of-living increases that have spread to other areas . For instance, food prices in the consumer price index have risen 1.9% over the past two months while shelter costs, which make up about one-third of CPI, are up 1.2% during the same period. Headline inflation, including food and energy prices, is still 8.3% higher year over year , while core inflation — excluding food and energy — has risen 6.3%, including a much higher than expected 0.6% monthly gain in August. The inability to tame inflation on a broad level could make policymakers impatient and also drive up longer-term interest rates, Ellen Zentner, Morgan Stanley's chief U.S. 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 0.75 percentage point rate increase and another hike of that size when it next meets in November, with pricing leaning toward a half-point move in December, according to the CME Group. Current market pricing in fed funds futures indicates the Fed's "terminal rate," or the point where it halts the rate increases, will hit 4.39% in April 2023. The Fed targets its benchmark rates in quarter-point ranges, so that's consistent with a terminal rate of 4.25%-4.5%. According to the rate-setting Federal Open Market Committee's projections in June, the terminal rate was expected to rise to 3.8% in 2023, meaning that current market pricing is about half a percentage point ahead of that outlook. But Zentner thinks the central bank may have to go even further to tackle inflation. The Atlanta Fed's measure of "sticky price" inflation of goods whose prices generally don't fluctuate a lot continues to rise, up 6.1% in August on a 12-month basis and 7.7% on a one-month 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 hasn't been above 5% since August 2007, according to Fed data. Those expectations for higher rates are causing Wall Street economists to rethink their projections for growth. Near term, Zentner cut her third-quarter outlook for gross domestic product to 0.8%, from 1%. That dovetails with the Atlanta Fed's GDPNow tracker , which in its latest update last week is now pointing to just 0.5% growth in Q3. Goldman Sachs also has raised its expectations for rate hikes this year, though it still sees a terminal rate in the 4%-4.25% range. The bank, however, cut its GDP outlook for 2023 to 1.1% from 1.5%. 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."