The stages of overcoming the new hawkish Federal Reserve’s policy and forward guidance

Although the Federal Reserve implemented its first interest rate hike approximately one year ago, market participants went through various stages of accepting the new Federal Reserve’s narrative as fact. Oddly there are similarities to the way market participants went through a process of steps before they were able to accept and incorporate the forward guidance of the Federal Reserve. There are similarities between the steps needed for the American public to accept the new hawkish monetary policy of the Fed and overcoming a major life event such as grief.

Both events cause strong and overwhelming emotions, and the process of acceptance occurs through a series of steps that are quite similar to the seven stages of grief. In this article, we will look at the similarities between processing and accepting both scenarios.

Recently we have seen market participants move from disbelief to accepting that the Federal Reserve would implement the plan they laid out in December 2022. After the December FOMC meeting, when they released a report titled” Economic projections 2023 – 2025”, which included the most current dot plot.

I entered the following question to Open AI’s GPT. “Can you compare the seven steps of grief to changes in the monetary policy of the Federal Reserve”, and got the following reply?

“As an AI language model, I do not hold personal opinions, but I can provide an analogy to help illustrate how the seven stages of grief could be compared to the process necessary to accept the Federal Reserve's new hawkish monetary policy.

The seven stages of grief are a model developed by psychiatrist Elisabeth Kubler-Ross to describe the process that people go through when they experience significant loss. The stages are denial, anger, bargaining, depression, acceptance, testing, and integration.

Similarly, the process of accepting the Federal Reserve's new hawkish monetary policy may involve several stages. At first, there may be a feeling of denial or disbelief that the policy is necessary. Then, there may be anger or frustration about the potential consequences of the policy, such as higher interest rates or reduced economic growth.

Afterward, people may try to bargain, seeking ways to mitigate the impact of the policy or find alternatives. As the policy takes effect, there may be feelings of depression or anxiety about the unknown future. Eventually, however, people may come to accept the policy as necessary and begin testing it to see how it affects them.

Finally, the policy may be integrated into people's understanding of the economy and their financial decisions. This process may take time and may involve setbacks and adjustments along the way. However, ultimately, the acceptance of the new policy may lead to a more stable and prosperous economy in the long term.”

While it is obvious that to compare the steps to overcome grief and the steps that market participants have taken to accept the new hawkish narrative of the Federal Reserve is a stretch, I believe that great insight can be gleaned from the AI platform.

Today’s decline in gold prices took the April futures contract below the opening of the first trading day on January 3. It is quite plausible that this most recent decline is a direct result of market participants accepting that the Federal Reserve “will do whatever it takes”, to reduce inflation to their target level of 2%. I believe the recent decline in gold clearly demonstrates that market participants have accepted the new narrative of the Federal Reserve.

Wishing you as always good trading,