Jan. 25 (Bloomberg) -- Federal Reserve policy makers weren't aware of the $7.2 billion trading loss at Societe Generale SA prior to their Jan. 21 decision to reduce interest rates, said a Fed official.

Policy makers were convinced by late December that increasing volatility in financial markets reflected a weakening U.S. economy and that further rate reductions were needed, the official, who spoke on condition of anonymity, said yesterday.

The Federal Open Market Committee convened a conference call at 6 p.m. on Jan. 21 after stock markets in Asia and Europe tumbled. Members voted to cut the federal funds rate by three quarters of a percentage point, the most since the Fed began using the rate as its main tool of monetary policy in 1990, to 3.5 percent. Chairman Ben S. Bernanke and his colleagues concluded that losses in financial markets may result in reduced credit for companies and consumers, the official said.

``Legitimately, one could say they moved not because they were panicked about the stock market but because it was telling them important things about the macroeconomy,'' said Peter Kretzmer, senior economist at Bank of America Securities LLC in New York.

The rate decision was announced at 8:20 a.m. the following day. Markets in the U.S. were closed on Jan. 21 for the Martin Luther King Jr. Day holiday. The Standard & Poor's 500 Index lost 5.4 percent the prior week and retreated 10 percent in the first three weeks of the year.

Bank of France Governor Christian Noyer said he learned at least four days ago that Societe Generale had identified a rogue trader whose positions led to 4.9 billion euros of losses, the largest in banking history. The Bank of France, the country's banking regulator, is investigating the trades.

`Immediately Informed'

``We were immediately informed,'' Noyer told reporters in Paris. ``That means in real time.'' He said he kept abreast ``throughout the weekend,'' which began on Saturday, Jan. 19.

Noyer declined to disclose the timeline of his exchanges with Societe Generale, or whether he notified the European Central Bank or the Federal Reserve.

``All necessary contacts were made in due course,'' he said. In Davos, Switzerland, ECB President Jean-Claude Trichet declined to comment.

Fed officials considered the risks of cutting rates before their scheduled Jan. 29-30 meeting and decided that the benefits outweighed the costs of waiting. They remain comfortable with that decision, the Fed official said.

``Broader financial-market conditions have continued to deteriorate and credit has tightened further for some businesses and households,'' the Fed said in its Jan. 22 statement. The FOMC took the action ``in view of a weakening of the economic outlook and increasing downside risks to growth.''

Rate-Cut Odds

Federal funds futures contracts show a 76 percent probability of a half-point reduction in the benchmark lending rate at the conclusion of the policy meeting next week, and a 24 percent chance of a quarter-point cut.

Bernanke has written research papers on how financial- market losses feed back into bank lending and restrict credit. Since early January, he and Fed Governor Frederic Mishkin built a case, through speeches, for faster, ``substantive'' rate cuts.

Their arguments were bolstered by signs that inflation expectations remained stable even as oil prices climbed to $100 a barrel and forecasts for economic growth were trimmed.

The S&P 500 closed 1.1 percent lower on Jan. 22 after the rate cut, compared with the 4.5 percent drop indicated by stock- index futures prices the previous evening.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: January 25, 2008 00:17 EST