Federal Reserve official: Geithner may have discussed rate cut with banks

A senior Federal Reserve official has alleged that then-New York Federal Reserve President Tim Geithner discussed a possible rate cut with major banks.

In a statement to Reuters, Jeffrey Lacker, the head of the Federal Reserve in Richmond, said the Treasury secretary had informed banks that the Federal Reserve was considering lowering one of its interest rates.

“From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market,” Lacker said in the statement to Reuters. “My understanding was that [New York Federal Reserve] President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives.”

The allegation first arose from Lacker in August 2007, according to a transcript of a video conference call released by the Federal Reserve this Friday. In the transcript from the 2007 conference call, Geithner denied that the banks were alerted to a possible rate cut.

Disclosing a possible cut of an interest rate before it becomes public is considered sensitive information. The day after the call, the Federal Reserve did cut the discount rate, which helped the market rally, according to Reuters.

During the call back in 2007, Geithner said the banks “obviously don't have any idea that we're contemplating a change in policy.” Lacker then questioned Geithner’s contention that the banks were unaware of a policy change and said he had spoken with the chief executive of Bank of America.

“Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that,” Lacker said.

Geithner replied that banks wanted to better understand Federal Reserve policy.

“Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the [discount lending] window,” Geithner said. “The only thing I’ve done is to try to help them understand … what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.”

Geithner is leaving his post at Treasury by the end of this month.

A Treasury spokesman told Reuters that they didn’t have any comment beyond the transcript.