As Americans long for lower interest rates, one economist says the Fed hasn’t gone far enough in its rate hikes—and prices will continue to rise because of it.

The Fed’s key tactic in battling stubbornly high inflation has been raising interest rates — but when the central bank stopped raising rates in July 2023, it didn’t get the tightening in the economy it suspected it would.

“I do think, as we’ve long argued, the Fed with this hyper focus on achieving the soft landing stopped short of where we needed to be to ensure a return to price stability, not just sit on the sidelines and hope for it, but ensure return back to 2%,” said Lindsey Piegza, Stifel’s chief economist.

After it peaked at 9% in June 2022, inflation has remained steady at 3.5% — higher than the Fed’s 2% target.

Typically when inflation soars, so does the unemployment rate — but the employment market rebounded quickly following the pandemic, even as inflation remained high.

Because of this, the Fed became hyper focused on a ‘soft landing’ by lowering inflation through rate hikes without seeking the typical spike in unemployment levels.

Piegza argues that the ‘soft landing’ approach led to increases in rates that haven’t gone far enough.

”We’re not there yet, because remember, part of the soft landing is that eventual return to price stability,” Piegza said.

“We’re still well above the 2% target with really no confidence yet that we will return to that disinflationary trend.”

What’s next for interest rates?

The Fed is set to meet next week to consider changes to interest rates, but economists aren’t expecting any movement from the central bank.

Instead, many see two rate cuts coming later in 2024 — with the first not expected until September.

”The Fed will be raising its inflation forecast at the June meeting and it would look odd to raise your inflation forecast and then cut rates quickly after that,” said Michael Galen, chief U.S. economist at Bank of America.

Galen expects just one cut this year, in December.

The Fed has given signals in recent weeks that a strong labor market would currently deter any changes to interest rates — with Federal Reserve Bank of Minneapolis president Neil Kashmiri calling the current low levels of unemployment a “luxury” for the U.S. economy.

”We are continuing to see this idea that labor demand is still outpacing labor supply perpetuating the notion of wage pressures and adding further uncertainty to that longer term outlook for inflation that the Fed is desperate to return to that 2% target,” Piegza said.

Piegza, for her part, argues that the economy is still on solid footing, making a rate decrease this year unlikely in her view.

“It’s going to be very difficult for the Fed to justify a rate reduction,” Piegza said. “They’re on track for an eventual reduction, but increasingly looks like a 2025 event to me.”