Economists and analysts said SG's unwinding could not have come at a worse time, with global markets already in 'offer' or sell mode, fearing a continued slowing of the U.S. economy would slow global growth. Still, economists were quick to point out that it may be months before financial officials and regulators determine how much SG's unwinding contributed to the market declines.

Further, Fed officials said Thursday the central bank didn't know about SG's unwinding, leading some economists and analysts to criticize the central banks actions, arguing that it inappropriately responding to market drops or that its rate cut is too large, given current U.S. economic conditions, The Wall Street Journal (subscription required) reported. The Fed has long argued that it only responds to large movements in the stock markets to the extent that they affect the U.S. economic outlook.

Still, the Fed said Thursday it remains comfortable with its decision, saying it was based on cumulative evidence of downside risks to the economy, of which mounting volatility in the markets was a symptom.

Fed didn't know?

Economist David H. Wang told BloggingStocks Friday "it seems almost implausible" that the Fed and French banking and monetary policy officials had not communicated, but "the Fed's information, is of course, dependent on what French central bank officials knew."

"It's a cliché, but in this instance it's appropriate. This rogue trader case is worthy of an international investigation," Wang said. "Even more so than the Fed, France has a major monetary issue on its hands concerning bank security and bank communication with its central bank."

Further, Wang disagreed with criticism that the Fed is responding too much to market volatility or that it has lowered interest rates too quickly. Wang said the Fed "had ample justification to lower rates [at this stage] even without the rogue trader incident." As Wang has outlined earlier, the U.S. bond insurer problem, eroding consumer confidence, and banks' unacceptable yield spread which is forcing some banks to pull-back commercial lending is more than enough fundamental evidence to warrant a 50 or 75 basis point rate cut.

"There are both liquidity and lending incentive issues present in the U.S. economy, and both must be addressed to get the economy moving again. The term auction facility is helping to address the former and rate cuts, the latter," Wang said. "The Fed's decision to cut rates substantially Tuesday was the right move."

Favors another rate cut

Wang added that he would like to see the Fed cut interest rates an additional 50 basis points at its regularly-scheduled meeting on Wednesday January 30, and he underscored that the rogue trader incident should not sway the Fed from doing so.

Economist Steve Affinito agreed. He said mounting economic evidence on housing sales, job growth, and business confidence, among other indicators, suggests the U.S. economy continues to slow.

"If anything, one could argue that the Fed has been late regarding interest rate cuts," Affinito told BloggingStocks Friday. "The consensus remains that the U.S. economy is going to need just about all the stimulus it can get, fiscal and monetary, to have any chance of avoiding a recession." Even with current interest rate cuts, Affinito put the chance of a U.S. recession in 2008 at 70%. He also expects the Fed to cut rates by another 50 basis points Wednesday.

Rate cuts: like pot luck food

Further, Affinito said interest rate hawks are ignoring the other side of the coin.

"If it turns out they've provided too much monetary policy stimulus, they can always re-raise rates, and inflation won't rise that much. The Fed can re-raise rates quickly when they have to," Affinito said. "It's like bringing too much food to a pot luck supper. If there's too much, it can be stored in refrigerators as leftovers."