The standard line at the Fed, and certainly within the Trump administration, says monetary policy in the US is restrictive.

I believe that on some days. Most days, probably. On others, though, I wonder.

After all, US equities and credit certainly don’t appear to be laboring under the tyranny of unduly onerous monetary policy, what with the S&P having made a habit of notching new records every three or so days and credit spreads as tight as they’ve ever been.

The figure below shows the Chicago Fed’s gauge of national financial conditions. Positive values are associated with tighter-than-average conditions, negative values with looser-than-average conditions.

The latest reading, from September 12, continued to suggest conditions have virtually never been easier. Other metrics — e.g., Goldman’s widely-cited FCI gauge — say something similar.

That’ll ring hollow to a lot of folks on Main Street, and particularly to America’s struggling renter class many of whom couldn’t buy the median home even if they had a downpayment because the monthlies on a $400,000 purchase are just too high when financed at 6.5%, three-decade term-out or not.

I get that, but… well, again, roaring risk assets aren’t something we generally associate with restrictive monetary policy. The AI mania has a lot of explanatory power in that discussion, but restrictive rates and 100%ile P/Es aren’t exactly peanut butter and jelly, if you get my drift.

With that in mind, the NY Fed’s out with its latest DSGE model forecasts for r-star — the real neutral rate. Let me just pause for a moment to acknowledge that kicking off the week with an article about a model forecast refresh for r-star is a cruel thing to do. People need to be coddled mentally and editorially on Monday mornings, and foisting upon them an r-star debate is nails on a chalkboard. Sorry about that.

Have a look at the figure below. It shows you the history of, and a forecast for, the DSGE model-implied nominal neutral rate (you add the 2% inflation target to the model output to get nominal neutral).

See the problem here? Policy’s not only not restrictive, it’s already stimulative. At least when assessed based on this model, which the Fed’s used to forecast economic variables for going on 15 years.

Do note: These model outputs aren’t an official New York Fed forecast. To quote the caveat the bank always includes, the DSGE is just “an input to the Research staff’s overall forecasting process.” It was made available to the public starting a decade ago.

The model also projects macro variables, and as a NY Fed editorial accompanying the latest forecasts explains, the increase in the model’s predictions for the short run neutral rate versus the June projections “partly reflect the strength in the economy and buoyant financial conditions.”

There you have it: Easy financial conditions, which in part reflect rallying stocks and tight credit spreads, are pushing up estimates of short run neutral. That’s another way of saying the wealth effect discussed here over the weekend was making policy settings less restrictive even before the Fed started cutting rates again.

The staff editorial spells it out. “Given the elevated short run r-star, the model views the policy stance as slightly accommodative over the next few quarters.” Put another way: The Fed’s policy stance is already stimulative (not restrictive) and is about to become more so.

If Stephen Miran had his way — i.e., if the already infamous “Miran dot” were to become actual policy — rates would be 175bps below neutral by year-end. That, in an economy expanding at a 3% clip and set against a stock market trading on one of the highest forward P/E multiples in recorded history.

Talk about gas on the fire.