The Overton Window
Political theory applied to monetary policy.
I want you, for just a moment, to place yourself in the shoes of Jerome Powell, Fed presidents and the rest of the board of governors at the Federal reserve.
Your job, by law, is to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates". You are now in an environment with high inflation, low employment AND low rates. These do not mix.
While you continued to blame short term “supply-chain disruptions” recent developments with respect to the ongoing conflict in Eastern Europe or the fresh wave of lockdowns hitting major industrial hubs in China have proved that your rosy outlook of the road to price recovery wasn’t so realistic after all.
The game you are trying play is simple. How to lower inflation and keep markets stable all the while having time and black swans hang over your neck like a guillotine.
What is the Overton window?
“The Overton Window is a model for understanding how ideas in society change over time and influence politics. The core concept is that politicians are limited in what policy ideas they can support — they generally only pursue policies that are widely accepted throughout society as legitimate policy options. These policies lie inside the Overton Window. Other policy ideas exist, but politicians risk losing popular support if they champion these ideas. These policies lie outside the Overton Window….
The Overton Window doesn't describe everything about how politics works, but it does describe one key thing: Politicians will not support whatever policy they choose whenever they choose; rather, they will only espouse policies that they believe do not hurt their electoral chances. And the range of policy options available to a politician are shaped by ideas, social movements and shared norms and values within society.”1
The FED, although intentioned to operate as a nonpolitical entity faces the same dynamic as our politicians. The FED cannot raise as much as they know they should less they spook markets and hurl the economy face first towards a recessionary environment; the likes of which have not been seen for over a hundred years.
The Overton Window offers perspective on the means of communication the Board of Governors will employ. A 25bps hike this Wednesday is all but confirmed. The press conference held by Jerome Powell afterwards is worthy of your attention because this is when and where we believe the more hawkish tilts will begin. In the days after, expect the rest of the Governors to push the needle. At first the hawks, but in due time the doves as well (looking at you Kashkari.)
https://www.mackinac.org/OvertonWindow