In other words, wrote analysts, “fiscal policy has pushed up the short-run neutral rate r*.”

The impulse from fiscal policy is however likely to moderate over the next 12-18 months which would bring the short-run r* down.

Evercore’s analysis employed a measure of the impact of fiscal policy by the Hutchins Center on Fiscal and Monetary Policy. Using this, they determined that fiscal policy is still boosting the economy by the equivalent of 0.7% GDP relative to a 2019 baseline. This estimate includes effects via household or business spending.

“If the Fed were to set policy to fully offset that stimulus, it would need to engineer long-term interest rates—such as the ten-year Treasury yield—that are nearly 25 basis points higher than in 2019,” wrote analysts in the note.

This would entail setting the Federal Funds rate about 70bps higher than otherwise.

An additional approach used by Evercore to determine the effect fiscal policy is having is the ‘optimal control’ model-based assessment. In order to offset fiscal stimulus today, this approach suggests the Federal Funds rate would have to be about 125bps higher than if there had been no stimulus.

This would explain why policy doesn’t appear very restrictive today, observed analysts.