Terminal Velocity! Fed Implied Terminal Rate Now 5.363% At July ’23 FOMC Meeting As US GDP Report Revised Lower On Weaker Consumer Spending In Q4 ’22 (GDP PRICE Index Revised UP To 3.9%)

Yesterday, we saw The Federal Reserve release the minutes of the last meeting. In a nutshell, The Fed is going to keep raising rates.

The terminal Fed Funds target rates is now 5.363% for the July FOMC (Fed Open Market Committee) meeting in 2023.

This comes as US Q4 GDP was revised lower on weaker consumer spending, revised downward to 1.4%

With the revision of Personal Consumption, real GDP was revised downward to 2.7% annualized QoQ.

The Taylor Rule estimate for The Fed Funds Target rate is 10.15%. The Fed is only at 4.75%, so there is a long way to go! Except that The Fed doesn’t follow any useful rule like the Taylor Rule. Just the “seat of the pants” rule.

The implied Fed rate is higher now that the GDP (overall spending of our nation including consumers, businesses, and government) is lower.

Just like a loaf of bread feels like it costs more if you're making less money. The Fed's interest rate feels higher now that we know the consumer portion of GDP is lower. We're spending less overall, yet paying the same in interest (at least interest on finance products related to the Fed's overnight interest rate to banks).

Obviously the interest rates have gone up recently, but by the "same" I mean in near recent history (as in since last Fed meeting). But one thing that has changed since the last Fed meeting is we now now consumer spending is lower. That means the interest portion of our budget (collectively) is now a larger portion of our budget (collectively) than we thought until today.

I agree 100% with you that the Fed's QT is probably a much larger factor than interest rates. Perhaps more so to folks with near retirement given that the Fed's lowering their balance sheet means less demand for U.S. treasuries (taking down the NAV share prices of treasury mutual funds in 401Ks in IRA's).

But like a lot of folks say about interest rates have been too low for too long and need to go up, I say the same about the Fed's balance sheet being too high and needing to go back closer to normal. If I had my way we'd get rid of the Fed. But since that's not going to happen then the 2nd best situation regarding the Fed is some normalcy of interest rates and balance sheet so to reduce the hidden tax of inflation. (At least the Fed's role in inflation.)

Quite a conversation to be had about all this. It would be more interesting if it were not so up close and personal to a retiree trying to manage as I am.

It is complicated but as I see it the benefit of this pain is perhaps tamed inflation cooling down the self-licking ice cream cone in a shock and awe type campaign. The QE and all the precipitate from it including abnormally and artificially low interest rates has been wrong headed to me. I wonder aloud though if the 12% GICs of the late 90s weren’t equally wrong. Gosh, that seems just unbelievable doesn’t it?

The hope and task of the retiree is to have enough of the nest egg remaining to live at the lowered inflation rate when this current campaign ends. Do we shift now to bonds when they may go even higher or dig in and wait for better equity days while trying to manage on dividends and a little bond interest while keeping the annuity in reserve? Or is there some other strategy?

I put us on short rations for five years starting a year ago. The goal is to not harvest the cow until she is on good feed and we can milk her again.

Clearly though, our nest eggs are shrinking and fast.

I plan to retire in 4 years. My wife is already retired. So I speak as someone with a foot half in retirement and soon to have both feet in retirement. Plus my wife and I are in our 50's, thus our nest egg needs to last a while.

Presently I'm out of equity mutual funds. I'm spread out among bond/money market/treasury funds with extra exposure to long-term treasury funds with the expectation that they go up in price as bear markets growl. (Notice I'm talking about treasury prices, not rates, which track inversely to each other.) I'm tempted to move money back into some of the equity funds because 9 of them have dropped more than 40% from their ATH. But I look mainly at the S&P 500 index fund, which has dropped only 17% from its ATH. When either that fund are the average across all of the equity funds drops 40% from their ATH I'll jump back into equity funds.

But if I wasn't timing the market. IMHO the best strategy is to spread out your investments across many mutual funds across many asset classes (I use 37 mutual funds for equities, counting a high-yield bond fund even though that's technically not an equity fund, and 12 mutual funds for various bond and treasury and money market funds.) Make the stock/bond ratio about 75%/25% so you can have average growth to help fight inflation.

Here's why IMHO you need only 25% in bonds. If you have a 4% annual withdrawal rate, then 25% in bonds can handle a market decline that lasts 6 years. Sure the 1930's great depression or 1970's depression might happen again and the stock market be down from their ATH's longer than 6 years. But those are outliers that may or may not happen again. Inflation is a real monster that you definitely have to plan against. Thus, the 70% or 75% in equities helps you fight inflation.

Then there's the diversification factor that also helps you with a long market downturn. If you look back in the past 50 years, there's no point in time that didn't have at least one of these asset classes at a high. In other words, if you're diversified enough there's always some fund that's good to pull from to live off of. If I'm wrong and you have a few years where not one equity fund is near a high, that's what the 25% in bonds is for.

Here's how you work your annual or monthly withdrawals in retirement. Look at your overall balance and multiply it by 4% (if monthly do the next step and divide that by 12). So if you have $1.5 million invested that's $60K (or $5K monthly). So of the many funds in your portfolio, where do you withdraw the money from? The answer: whichever funds have the highest balances. You don't have to figure out if your large-cap value fund is better than your small-cap growth fund during Fed rate hikes. Whichever one is high is good to withdraw from. You don't have to figure out if your energy fund or tech fund will go up as a traditional safe hedges during market downturns or if they're already so high now they won't go up further. Just do your annual withdrawal from whichever ones are high and let the market figure out the future.

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