In early August, Federal Reserve officials were on their guard but not quite convinced that problems in the mortgage market could spread and roil other parts of the credit market, according to just-released minutes of the Aug. 7 Federal Open Market Committee meeting."However, a further deterioration in financial conditions could not be ruled out," the minutes say, and it "might require a policy response." Ten days later, the Federal Reserve Board unexpectedly cut the discount rate it charges banks and thrifts for emergency funding by 50 basis points and the FOMC issued a statement saying "it is prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets." The Aug. 7 minutes also reveal that FOMC members were acknowledging that problems in the housing markets had become "deeper and more prolonged" than they had anticipated. "However, participants also observed that mortgage loans remained readily available to most potential borrowers," the minutes say.

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