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Published Feb. 5, 2008

In addition to the mundane matters the U.S. Federal Reserve considers at its regular meetings - economic growth and inflation, credit conditions and confidence - policymakers had a new, perhaps unstated, agenda item last week: their image.

Image isn't the same thing as credibility, which Ben Bernanke has made a priority in his two years as Fed chairman. When central bankers talk about credibility, they mean the public's confidence in the bank to ensure price stability, to guarantee that a dollar next year buys as much as a dollar today (oops).

That's why the Fed monitors inflation expectations so closely. It's a kind of report card from consumers and investors. Image is something else entirely. Central bankers don't talk about it; economists and journalists don't write about it. The word is rarely used in conjunction with the monetary authority. But it is front and center.

If the Fed was unaware of the huge liquidations by Societe Generale SA when it cut rates by 75 basis points, and if the two-day rout in overseas stock markets was a direct result of those forced liquidations, then the central bank looks as if it was snookered. (Houston, we have an image problem.)

What's more, it reinforces the view that the stock market drives the Fed, not the other way around.

Now, none of this is the Fed's fault. Bank of France governor Christian Noyer testified to a Senate panel that he notified the European Central Bank and Fed on Jan. 23, after Societe Generale had finished unwinding 50-billion euros ($74-billion) in unauthorized trades by rogue trader Jerome Kerviel. Noyer said he was complying with Societe Generale chairman Daniel Bouton's request to keep things under the rug until the bank could unload its positions.

Once the timeline of events became public, there was an uneasy sense that the Fed had been hoodwinked, at least in terms of the timing of its move.

And no wonder. There's a nuanced difference between a rate cut intended to restore confidence and to support the financial system (all of us), and one aimed at bailing out Wall Street (just them). Many folks find them one and the same.

If I were an image consultant, whatever that is, I would have advised the Fed to lower its benchmark rate 50 basis points at last week's meeting, which is what it did. Standing pat would have been an admission of, yes, we were stampeded into giving you 75 basis points when we could have waited until the meeting.

Cutting short-term rates again eight days later gives the impression that the moves were a designed, if delayed, effort to restore policy to a more appropriate setting.