A week later, the Fed held an emergency meeting to cut its "discount rate" â¿¿ the rate it charges on emergency loans to banks. Then in September, the Fed cut its key short-term interest rate for the first time since 2003 by one-half percentage point from 5.25 percent to 4.75 percent. The goal was to help ease loan rates throughout the economy. The Fed would cut the rate two more times in 2007 as the financial crisis worsened, leaving its target for short-term interest at 4.25 percent at the end of the year.
By the October meeting, Fed members expressed some relief that the crisis appeared to be contained, at least for the time being. Fed officials cited more stability in financial markets and solid growth in the July-September quarter for this belief.
Bernanke did acknowledge that there was "an unusual amount of uncertainty" surrounding the Fed's economic forecasts. But in summing up the views of the committee, Bernanke said that in the overall economy, "there is yet no clear sign of a spillover from housing."
At the December meeting, the Fed staff presented its economic forecasts for 2008 and 2009. Growth would slow in 2008, the staff predicted, but the economy would avoid a recession. And growth would rebound in 2009, it forecast.Even while Bernanke voiced concerns about the lending market and the quality of real estate loans, he predicted at the December meeting that no major bank would fail. "The result of this is that, although I do not expect insolvency or near insolvency among major financial institutions, they are certainly going to become more cautious." During the same meeting, Fed economist Dave Stockton, speaking for the staff, said the forecasts sketched a "pretty benign picture" of the economy. He joked that the Fed staff had come up with the projections "unimpaired and on nothing stronger than many late nights of diet Pepsi and vending-machine Twinkies."