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Central Bankers Take Steps Where Politicians Fear to Tread
Franklin Templeton Investments
By John Remmert
November 16, 2012

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In a perfect world, a nation’s leaders could easily conjure the ideal combination of fiscal and/or monetary policies to achieve a specific economic objective. The reality is that policy tools don’t always work in harmony, and when used at the wrong time, can even be counterproductive. In the past few years, many global central banks have enacted various measures to stimulate their respective economies—in some cases without the support of fiscal measures—and sometimes to little effect. John Remmert, senior vice president and senior portfolio manager for Franklin Equity Group®, shares his insights on why central banks have acted in some cases where politicians seemed fearful to tread.

During the third quarter of this year, global equity markets were generally in rally mode but global economic news was a mixed bag. In Remmert’s view, it seemed as if market participants were more hopeful that central bank actions taken during the quarter would help jump-start the global economy, perhaps to a greater degree than in the past. These actions included the European Central Bank’s (ECB’s) Outright Monetary Transactions (OMT) initiative and the U.S. Federal Reserve’s (Fed’s) third round of quantitative easing (QE3). The obvious question is if central banks have been using a variety of tools to stimulate their respective economies for years, why the optimism this time around?

“Previous (central bank) actions have had limited impact on restarting the economy, although they were seemingly effective in forestalling a global recession. In a significant policy change, neither bond-buying program established any limits in terms of size, scope or duration. In the EU through OMT, the ECB has committed to secondary-market purchases of sovereign bonds of one- to three-years’ duration issued by weakened European governments, provided those governments abide by strict conditions in return for such aid. The ECB also dropped its claim to senior creditor status to help stimulate private investor buying. However, with proposals to create a unified euro-region banking regulator and insurance scheme tabled, we have seen limited real agreement among eurozone member states on what many observers consider significant sovereign rights and fiscal responsibility issues.”

In the U.S., the Fed announced in mid-September that it would undertake QE3 with the goal of helping to boost growth and reduce unemployment, and initiated its first purchase of $40 billion of mortgage debt. This third round of quantitative easing differed in a key aspect from the first two rounds—a rather open-ended tie to improvement in a key economic indicator. Remmert explains the importance:

“Fed Chairman Ben Bernanke said the central bank would maintain these monthly purchases until ‘sustained improvement’ in the labor markets was achieved, unlike in the case of QE1 and QE2, for which specific limits were established. The central bank also pledged to maintain its highly accommodative stance of monetary policy and keep its federal funds target rate at exceptionally low levels until mid-2015. Given the political backdrop in the U.S., with what we viewed as a contentious general election and an absence of bipartisanship, we believe the Fed has been forced to continue experimenting with monetary policy to effect change because politicians have fallen short.”

Japan also joined the trend of global easing, as its central bank, the Bank of Japan, announced in September that it was increasing its asset-purchase program from ¥45 trillion to ¥55 trillion ($695 billion) to help stimulate growth.

Central bankers have taken some bold measures, even when politicians seemed paralyzed. One hopes the paralysis will lift, but Remmert cautions not to expect any miracles in that regard, particularly in the case of the U.S.

“While central bankers have taken steps where politicians have seemed incapable, we are aware that four years after the Lehman Brothers bankruptcy, global growth has largely remained stagnant. For us, the broader question remains whether politicians will take meaningful action in a timely manner to address fiscal policy, thus helping economies and equity markets progress, or whether the recent rally is temporary and meaningful economic recovery remains a few years away as politicians put off any real action and ‘kick the can’ down what we think is becoming a shorter and shorter road.

We believe any recovery will likely be fragile and could be prone to further setbacks, especially if politicians fail to take meaningful policy action in the near term to help balance certain public debt problems that could continue to weigh on global growth.”


The information provided in this posting is not a complete analysis of every material fact regarding any country, region, market, industry, or fund. Comments, opinions, and analyses contained herein are those of Franklin Templeton Investments and the quoted person(s) and are for informational purposes only. Because market and economic conditions are subject to change, these comments, opinions and analyses are rendered as of the date of this posting and may change without notice. Their opinions are intended to provide insight as to how the quoted manager analyzes securities and the commentary is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. Reliance upon information in this posting is at the sole discretion of the viewer. Please consult your own professional adviser before investing.

Investments involve risk. The value of investments can go down as well as up, and investors may not get back the full amount invested.

For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

Data from third party sources may have been used in the preparation of this commentary and neither the author nor Franklin Templeton Investments has independently verified, validated or audited such data. We do not guarantee its accuracy.

Franklin Templeton Investments and the author accept no liability whatsoever for any loss arising from use of this posting or any information, opinion or estimate herein.

Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton Investments’ US registered products.
Copyright © 2012. Franklin Templeton Investments. All rights reserved.



(c) Franklin Templeton Investments


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