Federal Reserve Board policymakers did not have foreknowledge of the scandal revealed at Societe Generale when they made an emergency interest rate cut early Tuesday morning, a Fed source said Thursday.
The Fed source said that the SocGen problems, which reportedly resulted in a $7 billion loss for the French banking giant, did not influence the Federal Open Market Committee decision to cut the federal funds rate by 75 basis points and said that the FOMC would have made the rate cut regardless of the development.
The Fed source said that the inter-meeting rate cut announced a week before a regularly scheduled FOMC meeting was the culmination of a series of developments since December, which had changed the Fed’s perceptions of the outlook for the U.S. economy.
The source said the decision was made after considering not just the heightened volatility in financial markets worldwide Monday, but also a series of softer economic indicators.
It was the assortment of economic and financial considerations that led Fed chairman Ben Bernanke to signal a change in the Fed’s policy intentions in a Jan. 10 speech to the Women in Housing and Finance in Washington and in subsequent congressional testimony, the source said.
The source also said that Fed policymakers continue to stand by their decision to cut rates Tuesday morning, which was agreed upon in a conference call the previous evening, and said that the SocGen fraud and subsequent losses would not have altered the decision.
The Fed source observed that financial markets have been subject to a great deal of volatility lately and that there had been much volatility on Monday preceding the rate cut, but he maintained that the problems of SocGen had little impact on this volatility.
— Market News International
