&copy Bloomberg. An eagle sculpture stands on the facade of the Marriner S. Eccles Federal Reserve building in Washington, DC. Photographer: Andrew Harrer/Bloomberg

(Bloomberg) — Markets aren’t prepared for how far US central bankers are willing to go to tame the hottest inflation in a generation, according to Morgan Stanley (NYSE:) Investment Management’s Jim Caron.

Even though Federal Reserve officials are predicting raising interest rates above 5% next year, traders continue to underprice the future path of policy tightening, the asset manager’s chief fixed-income strategist said in a Bloomberg TV interview Wednesday.

“I don’t believe the hiking cycles are sufficiently priced in,” Caron said. “What’s priced in is that people expect rates to come down and I think we need to listen to what the central bankers are saying” and their worries about inflation.

Policy makers continue to reinforce their hawkish message on the need for higher rates and tighter monetary policy until inflation is under control. Last week, a handful of policy makers stressed the central bank’s commitment to lowering inflation back to their 2% target and the need for clear evidence of easing price pressures.

The Fed hiked interest rates by a half percentage point last week at its final policy meeting of the year, bringing their benchmark to a target range of 4.25% to 4.5%. The so-called dot plot shows rates ending next year at 5.1%, up from 4.6% in the prior round of projections. Yet Fed-dated overnight index swaps are pricing just over 50 basis points of rate increases by the May meeting, followed by half-a-percentage point of reductions by the end of 2023.

Unless something dramatic happens, Caron expects the Fed to keep rates at 5.25% for a period of time to ensure inflation is under control.

“The Fed needs to get the job done,” he said.

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