Kevin Mahn

About the Author Kevin Mahn

Kevin D. Mahn joined Parsippany, NJ based Hennion & Walsh as a Managing Director in 2004. Currently serving as the President and Chief Investment Officer of Hennion & Walsh Asset Management, Mr. Mahn is responsible for all of the Wealth and Asset Management products and services offered at the Firm including the portfolio creation and portfolio supervision of the various portfolio strategies within the SmartTrust® series of Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit http://www.smarttrustuit.com. Mr. Mahn also was the Portfolio Manager of the family of SmartGrowth® Mutual Funds. The Funds were target-risk oriented "mutual funds of ETFs" designed to track the Lipper Optimal Indices. Mr. Mahn is the author of the quarterly “ETF and CEF Insights” and "Market Outlook" newsletters as well as a co-author of the book, Exchange Traded Funds: Conceptual and Practical Investment Approaches, © 2009 Riskbooks. Mr. Mahn is a member of the Forbes Investor team and a frequent contributor to the Forbes Intelligent Investing blog and the Seeking Alpha website. Prior to Hennion & Walsh, Mr. Mahn was a Senior Vice President at Lehman Brothers where he held several senior management positions, including CAO of the High Net Worth Product and Services group within Lehman’s Wealth and Asset Management division as well as COO of Lehman Brothers Bank, during his eleven year tenure with the Firm. Mr. Mahn received his Bachelor's degree in Business Administration from Muhlenberg College and his M.B.A. in Finance from Fairleigh Dickinson University. Mr. Mahn has also served as an adjunct professor at Fairleigh Dickinson University within the Department of Economics, Finance and International Business. Mr. Mahn was the recipient of the 2009 Institutional Investor Rising Stars of Mutual Funds Award and currently serves as Co-Chair of the NICSA UIT Industry Committee. Interviews with, as well as byline articles and insights from, Mr. Mahn have appeared in/on CBS News, CNBC, Fox Business News, Wall Street Journal, Investor’s Business Daily, Fortune, Forbes, Business Week, New York Times, Wall Street Week, CNNMoney.com, Investment Advisor Magazine, SmartMoney, The Star-Ledger, The Daily Record, Reuters, Fund Action, The Street.com, CNBC.com, Fox Business.com, Dow Jones Newswires, MarketWatch, Ignites, Ticker Magazine, Money Management Executive, Daily Finance, Wall Street Transcript, Registered Rep., Financial Planning, International Business Times, Risk Magazine, ETF Radar Magazine, Structured Products Daily, Financial Times and Investment News.

The Federal Reserve Maintains ‘Hovish’ Stance But More Rate Hikes Expected In 2016

Following their meeting this week, the Federal Reserve (Fed) chose to leave interest rates unchanged again. While we believe that the Fed would like to adopt more of an increasingly hawkish stance given solidifying economic data in the U.S. and mounting inflationary pressures, it seems that they continue to strike somewhat of a dovish tone to appease certain vocal dissenters and those concerned with global economic growth altogether –though they did indicate in the current release that international factors were no longer as much of a concern by removing the previous wording of, “global economic and financial developments continue to pose risks.”

Hence, we are introducing the “hovish” term to describe this current hybrid state of hawkish/dovish positioning by the Fed. It should be interesting to see if others start to adopt our new nomenclature as well.

Based on outtakes from the Federal Open Market Committee (FOMC) meetings, I currently believe that there will be 2 – potentially 3 – additional rate hikes of 25 Basis Points (i.e. 0.25%) in 2016, with the next hike likely taking place in June and the following hike in late summer/early fall before the presidential election cycle really starts to heat up. This would result in a Fed Funds Target rate in the range of 0.75%-1.00% by the end of 2016.

Our forecast is slightly below that of the weighted 2016 target rate forecast of the Fed based on the last released forecasts of the FOMC participants stemming from their December 2015 meeting (see table below) but consistent with what many in the market now believe will be the likely path for this year. We will look to post more recent data in this regard once available.

2016 Target Rate Number of Fed Participants % of Voting Fed Participants Weighted 2016 Target Rate
0.875% 4 23.53% 0.21%
1.125% 3 17.65% 0.20%
1.375% 7 41.18% 0.57%
1.625% 2 11.76% 0.19%
1.875% 0 0.00% 0.00%
2.125% 1 5.88% 0.13%
2.375% 0 0.00% 0.00%
2.500% 0 0.00% 0.00%
2.625% 0 0.00% 0.00%
Totals 17 100% 1.29%

Source: Board of Governors of the Federal Reserve System, Fed’s Projection of the Midpoint Target Range or Target Level, December 2015.

One other notable research firm that our forecast is well below is Capital Economics as they stated in their “U.S. Chart Book” on April 25, 2016, that they expect the next rate hike to be in June, with the fed funds rate reaching 1.00% to 1.25% by this year-end, and 2.25% to 2.50% by the end of 2017.

Looking to next year, the weighted Fed Funds target rate for 2017 currently calculates to a rate of 2.29%, though we presently believe that the target rate will likely be closer to 1.75%-2.00% by the end of 2017.

As a result, based on current data and forecasts, it is fair to conclude that interest rates will remain at historically low levels for the foreseeable future.

We, at Hennion & Walsh, also still contend that going forward, the Fed will likely follow the blueprint that it utilized during the 2004-2006 tightening period when it gradually raised the Federal Funds Target Rate on 17 different occasions in 25 Basis-Point increments over this time frame.

The only difference during this round of tightening that we see is that the Fed may also consider starting to slowly shrink the size of their U.S. Treasuries and Government Agencies securities laden balance sheet, in conjunction with increases to the Federal Funds Target Rate.

In other words, instead of just considering raising rates further after each FOMC meeting, they may eventually consider some form of a gradual 1-2 punch of rate increases and sales of U.S. Treasuries (or non-reinvestment of the principal of existing maturing bonds) off of their balance sheet… though not necessarily after each FOMC meeting.