Did the Fed panic?

David Jones, president and CEO of DMJ Advisors, and a Fed watcher with more than 30 years of experience on Wall Street, agrees.

“Clearly, the Fed was being led by the markets,” Jones says. “[This approach won’t] satisfy the market — it will always call for more. The Fed should not allow itself to be perceived as always cutting for the markets.”

Jamie Coleman, managing editor at Thomas FX Hub adds, “The overall tone of the market is fairly negative on the Fed at the moment, [mostly] on a communication standpoint. The timing [of the Jan. 22 ease] is suspect. It looks like they panicked.”

U.S. traders were frozen out of the action on Jan. 21, as U.S. markets were closed for the Martin Luther King holiday. But traders watched as overseas equity markets collapsed, seemingly amid concerns that U.S. weakness would spread globally. The Fed stepped in on Jan. 22 presumably to offer liquidity, stability, and confidence to the deteriorating market situation.

Rogers notes that while the Fed stepped in on Jan. 22 in response to the large, unexpected declines in overseas equity markets, in hindsight, the declines were tied to a rogue trader at a French bank.

He is referring to news a Sociétié Générale (Soc Gen) trader had built up a $73-billion position that generated a $7-billion loss for the bank. The unwinding of those bad trades was widely seen as a major factor behind the tumble on European bourses on Jan. 21.

“It turned out a day or two later that the big panic [in European equities] was the Soc Gen debacle,” says Coleman. “There was no coordination between central banks. [Fed hairman Ben] Bernanke was out of the loop or the ECB was out of the loop.”