Fed says was unaware of SocGen losses

By Mark Felsenthal and Ros Krasny

WASHINGTON/CHICAGO (Reuters) - The Federal Reserve, when it decided on an emergency interest rate cut this week, was unaware of a scandal involving a rogue trader that led to about $7 billion in losses at France's Societe Generale, a Fed official said on Thursday.

Still, the heavy losses at SocGen (SOGN.PA: Quote, Profile, Research, Stock Buzz), France's second-biggest bank, dealt a blow to the Fed's credibility in the eyes of some financial market participants, who wondered if policy-makers blundered in making the biggest U.S. interest rate cut in a generation on Tuesday.

"Their panicky rate cut was not to insure the smooth functioning of the markets, but rather, to guarantee prices," said Barry Ritholtz, a market analyst at Ritholtz Research & Analytics.

"We quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices," Ritholtz wrote on his blog, The Big Picture.

The U.S. central bank on Tuesday morning stunned markets by slashing overnight borrowing costs by three-quarters of a percentage point, to 3.5 percent. The cut came a day after a global stocks rout and just a week ahead of the Fed's next scheduled policy meeting. U.S. markets, closed on Monday for a holiday, were set to reopen when the Fed acted.

Initially, analysts attributed the swoon in global markets exclusively to worries about the possibility of a global meltdown triggered by mounting U.S. economic problems. But on Thursday, after SocGen said it had tried to close out rogue positions on Monday, some analysts said the bank's sales may have played a big role in the day's sell-off.

The re-evaluation led traders to ratchet back expectations for another big rate reduction at the U.S. central bank's January 29-30 policy meeting.

The SocGen blowup "suggests more big rate cuts near term might not be so necessary," said strategists at Action Economics.