Stocks Find No Solace in Fed

"Participants noted that investors had become much more uncertain about the likely future cash flows from subprime and certain other nontraditional mortgages, and thus about the valuation of securities backed by such mortgages," the minutes said.

But the panel also reiterated its inflation concerns. "Readings on core inflation had improved modestly in recent months but did not yet convincingly demonstrate a sustained moderation of inflation pressures, and ... the high level of resource utilization had the potential to sustain inflation pressures," the Fed said.

"Against this backdrop, members judged that the risk that inflation would fail to moderate as expected continued to outweigh other policy concerns," the minutes added.

The meeting came before credit worries significantly worsened, leading the Fed to cut its discount rate -- the interest it charges on loans to banks -- by 50 basis points. Many market participants are hoping in a reduction for the fed funds target, possibly as soon as Sept. 18, when the FOMC next meets.

"This Fed is very different from the Alan Greenspan-era in that they're dealing with a liquidity crisis through the discount window," said Paul Nolte, director of investments with Hinsdale Associates. "It is this Fed's view that the economy is still OK and that the liquidity problem is restricted to the financial sector. These minutes have taken hopes of a rate cut at the September meeting away.

"The economy is still weakening and will warrant a cut eventually," added Nolte. "The Fed doesn't have tools to deal with this type of problem today, so it's hard to say the way they're dealing with this is the right way, and we won't know until six months to a year from now."

Elsewhere on the economic front, the Conference Board said its consumer confidence index slid to a reading of 105 in August, as expected, from a revised 111.9 in July.