[Quest:] The European Central bank kept interest rates on hold as President Mario Draghi talked down the threat of deflation. But he said the weak inflation we're seeing now is a threat, and if it goes on, he will act. The president said he's keeping a close eye on the progress of the recovery.
[Mario Draghi, President, European Central Bank:] As I said many times, we've got to be extremely cautious with this recovery, because it's still fragile and it's still uneven. And it really starts from low levels of activity. But so far, it's proceeding.
[Quest:] Mario Draghi. But you can't help notice that the world's central banks are moving in contrary directions. Some seem bent on a regime of slimming and trimming stimulus, while others are attempting to loosen the monetary corsets. Now, the ECB, for example, may signal that it's going to loosen and have a rate cut. Draghi says he's ready and willing to act. He's looking more for more inflation information. But there's no question about it, the market does believe the ECB needs to do more, whether via LTRO or interest rates or some other form of liquidity provision. On the other hand, the Bank of England is waiting for escape velocity, and with unemployment coming down faster than expected, and at the same time, forward guidance from the new governor Mark Carney looking a little ropey, one might say. Then, of course, everyone's waiting for the forward guidance change, which could probably come with the inflation report next Wednesday. On to the US Fed, and the Federal Reserve, here we have tapering and tightening. Now, they've reduced by $10 billion a month over the last two meetings, and they say that will continue for the rest of the year. The new chair, Janet Yellen, has taken over during the course of February. Although it's not tightening, the amount of stimulus is not as great, and I suppose you could make a semantic argument that there's a tightening involved in that. Finally to the Bank of Japan. And here, of course, we have Abenomics in full throttle, ready to expand stimulus. They've got a target of 2 percent inflation, and already, they presided over a year of almost extraordinary pump priming to try and boost the economy. There's where the central banks are looking. Professor Richard Clarida is professor of economics at Columbia and he joins me now. Good to see you, Richard.
[Richard Clarida, Professor Of Economics, Columbia University:] Good to see you.
[Quest:] Thank you for coming in.
[Clarida:] Absolutely.
[Quest:] So, last night we talked about, on this program, how central banks do not appear to be coordinated at the moment, barely consulting with each other. When you hear that summary then, the central banks are at different points in the scale.
[Clarida:] Absolutely. The Bank of Japan really just got started a year ago doing massive quantitative easing. We expect them to double down on that later this year. Obviously, the Bank of England has done its forward guidance, it hasn't done quantitative easing in a while. The Fed is tapering. And as you correctly said, the inflation data's very soft in Europe, and the ECB will probably act this year.
[Quest:] Right, but here we have a situation where the Fed is withdrawing stimulus, but the ECB is likely to have to add stimulus. Now, if you've got the two largest trading blocs in the world at opposite or contrary monetary positions, is that dangerous?
[Clarida:] I don't think it's dangerous, but it does introduce volatility into the markets, and I think going forward, that will be a fact of life in the global economy, central banks moving on courses that are right for their economies at the time. So, cooperation, coordination is all nice, but usually the most we can get is correlated policies, not cooperating policies. And now, they're less correlated.
[Quest:] Right. That was my next one. Do you believe they're less correlated at the moment?
[Clarida:] Oh
[Quest:] I mean, they all sit around the table, and they all know each other.
[Clarida:] Sure.
[Quest:] And they're on first-name terms.
[Clarida:] Yes. Yes, absolutely. And of course, the important thing with Yellen coming in is she knows this crowd, so she'll hit the ground running in that. But let's don't get off the big picture. The big picture here is we're in a period of very, very easy, accommodative monetary policy for some time to come.
[Quest:] Oh, right.
[Clarida:] So, the Fed is tapering, but it's still buying a lot of securities this year.
[Quest:] Do you buy this idea that we're not going to have deflation in the eurozone?
[Clarida:] I certainly hope not. I have every confidence that Draghi will do whatever it takes to avoid it. But they're getting too close for my comfort, Richard.
[Quest:] Right, but there's nothing much what more can he do? His interest rate is virtually zero bound. He can do liquidity in other ways. He can do a few more LTROs. But if people don't want to borrow, he's between a rock and a hard place.
[Clarida:] Well, there are a couple points, though. The ECB has opened up the possibility that they may directly intervene and start buying loans from banks, secure price loans.
[Quest:] Right.
[Clarida:] That would be a new step. And also remember, Richard, they haven't really done real QE yet. They've had this really complicated
[Quest:] They can't.
[Clarida:] process of
[Quest:] Well, they can't. They can't.
[Clarida:] of rate bumpers. Well, they can do more than they've done, I think.
[Quest:] And you're expecting them to?
[Clarida:] I'm not sure if they'll do more of that, but they'll do more this year.
[Quest:] Good to see you, Richard, come back again.
[Clarida:] Good to see you. Absolutely.
[Quest:] Many thanks, indeed.
[Clarida:] Yes.
[Quest:] Now, the New York Department of Financial Services is the newest member of the gang of law enforcement officials and international regulators investigating banks' foreign exchange trading practices. The banking regulator, Benjamin Lawsky, has asked more than a dozen banks to hand over documents. The probe hopes to determine if banks rigged the $5 trillion-per-day currency markets. Investigators are looking to see if traders manipulated the so-called "fix." The fix is the time of day, at 4:00 PM, 18 minutes ago, when interest rate prices are set. A flurry of trade spotted just before the 4:00 PM deadline makes regulators suspicious. Allegations that bankers got together on chat rooms and shared information about their positions to beat the clock. Arun Srivastava is partner at Baker & McKenzie and joins me now from CNN London. Is this a case I mean, this has the potential, because the forex market, Arun, is so vast, this has the potential to make libor scandal look like a walk in the park.
[Arun Srivastava, Partner, Baker & Mckenzie:] I think that's right. It's an absolutely huge market spanning multiple jurisdictions. So, this case has the hallmarks of the libor case, written much larger, though.
[Quest:] And everybody seems to I say everybody, and I don't mean literally everybody. But all the major banks and all the major players seem to be in some way allegedly implicated.
[Srivastava:] That's right. And there are a lot of banks which have been implicated in the press and investigations. Of course, at the moment, we're at the stage of the investigation without any findings being made. But many major global banks are set to be helping regulators and investigators.
[Quest:] What are they said to have done?
[Srivastava:] Well, there's two central allegations. One is the one that you mentioned already, which is essentially collusion. So, individuals within the bank colluding with other individuals at other banks to manipulate the fix, to position it in a way that is beneficial to them and potentially detrimental to their clients. And if that is proven, it raises issues around potentially fraudulent conduct, but also collusion may result competition issues as well, where there's information sharing. The other central allegation that's made is relating to front running.
[Quest:] Right.
[Srivastava:] And that's essentially where
[Quest:] Where you get ahead of your clients.
[Srivastava:] where you keep information. Yes, exactly. And then you abuse that information and trade on it for your own benefit and again, potentially adverse to your client.
[Quest:] Now, the front running has been around before. There's nothing new about it, necessarily, on the front running. The fixing allegation, of course, is is rigging the whole market, isn't it? If proven, you are rigging the market.
[Srivastava:] I think that's right. It's a far more serious allegation because it more clearly demonstrates a deliberate strategy to pursue an unlawful purpose.
[Quest:] Right. But forex is so vast, Arun. We know with libor, you fix with a certain number of banks and it's a complicated process. But there's not many players involved in the libor fixing mechanism. However, forex is so vast, how could this be done?
[Srivastava:] Yes, it's a fair point to make. And the one point a lot of people have made is that these are such large markets, it's actually very difficult for certain banks for individuals at banks to actually bring about any change in the rates. But one feature of this market is that there's a big concentration of power, if you like, in the foreign exchange market, in a few banks. And also, you can look at currency pairings, which are not liquid. So, not potentially the major currencies, but the currencies which are not traded as frequently as others. Or even in forums or execution venues, which are not as liquid as the larger ones. And these sort of avenues are potentially open to bring about this allegation of rigging of the market.
[Quest:] In a word, we're going to hear more of this, aren't we? This ain't going away fast.
[Srivastava:] This is not going away, and there may be plenty of other benchmarks that are being investigated.
[Quest:] Right.
[Srivastava:] One thing that's happened since libor is it's opened a lot of doors into a lot of other markets, which have got regulators interested.
[Quest:] Good to talk to you. Thank you, sir, for joining us from Baker & McKenzie
[Srivastava:] Thanks a lot. Pleasure.
[Quest:] and putting this into perspective. Appreciate that. Obviously, these are very difficult allegations to discuss, particularly bearing in mind the number of people involved and the complexity. And note, of course, that so far, nothing's been proven. Still to come, Pope Francis' Harley Davidson goes under the hammer in France, and we'll have a look at it in a moment.