The Fed's statement after the August 7th meeting indicated the primary concern was inflation's potential impact on the economy. In the week's leading up to the August 17th discount rate reduction, the Fed made a number of statements indicating the subprime issue was" contained". This was an indication the Fed felt the subprime problems would not impact the rest of the market and economy. On August 17th they essentially tore up the prior statement and conceded the subprime situation could have a longer term impact on future economic growth.
A recent Bloomberg article noted:
"It was a rookie mistake,'' said Kenneth Thomas, a finance professor at the University of Pennsylvania's Wharton School in Philadelphia. The Fed "underestimated liquidity needs'' of investors and the fallout from the housing recession, he said, adding, "This demonstrates the difference between book-smart and street-smart." (emphasis added)
Many current Fed member's experiences are grounded in their academic backgrounds. The market does not always follow a particular model. Common sense and real world experience can go a long way in developing successful investment portfolios as well.
Bernanke's "Rookie" Mistake Forces Fed To Shift Focus To Market
By: Craig Torres
August 20, 2007