Updated from 3:18 p.m. EST

The minutes of the Federal Reserve's Dec. 11 meeting, released Wednesday, compounded the market's pessimism, and helped lead the market to one of its worst first trading days of the year ever.

Insight into the Fed's thinking on its December decision to lower the federal funds rate by 25 basis points came on the heels of the new year's first economic data point, which highlighted the economy's turn for the worse.

The Dow Jones Industrial Average and the S&P 500 was down Wednesday morning when investors learned that the Institute for Supply Management's read on economic activity fell to it's lowest level in four and half years. The ISM survey indicated a contracting economy with a reading below 50 for December of 47.7. Analysts had expected a 50.5 reading. Likewise threatening the economic picture was the price of oil Wednesday, which reached $100 per barrel for the first time in history.

By the end of the trading day, the Dow fell 1.67%, or 220 points, its worst first day of the year ever, according to Dow Jones. The S&P 500 slumped 1.4%, the sixth-worst start to year in history, according to Standard & Poor's.

The financial sector was once again hard-hit, as fears that mortgage-related losses and a weak economy will intensify and speculation about layoffs in the space loomed. Shares of Goldman Sachs ( GS) were down 3.5%, Merrill Lynch ( MER) was off 1.7%, Citigroup ( C) was down 1.8% and Wachovia ( WB) sank 2.3%.

The minutes of the December meeting were received with familiar discontent. The Federal Open Market Committee disappointed the market in December when it cut the fed funds rate by just 25 basis points to 4.25%, and the rate charged at the Fed's discount window by 25 basis to 4.75%. Investors wanted more, as the credit crunch had regained its grip, threatening normal operations in the financial markets and particularly the market for short-term funding of financial institutions.

On the impact of the credit crunch, the minutes echoed the message of the ISM, which is that the economy did weaken considerably in the fourth quarter of 2007. Economists heralded Wednesday's ISM report as evidence of an inventory overhang, or correction, which may bring the fourth quarter GDP to around 1% or lower, according to many.

"After the robust gains of the summer, economic activity decelerated significantly in the fourth quarter," read the minutes.

The Fed highlighted the continued correction in the housing market as the culprit for its real economy concerns, and noted slowing employment, industrial production, weaker demand for cars and generally flat consumer spending. The Fed also highlighted weaker business spending in the fourth quarter, countering the prior two quarters of increases. Third-quarter GDP was strong at 3.9% on the back of rising exports and increased business spending.

Reverberating against Wednesday's $100 per barrel oil was the Fed's take on inflation. Back in December, markets didn't want to hear high or low about inflation, as the credit crunch and liquidity crisis facing banks and financial institutions at year end seemed the most pertinent threat to the economy. But, the Fed's minutes indicated that the central bank was anything but blasé about inflation.

"Headline consumer price inflation increased in September and October from its low rates in the summer as the surge in crude oil prices began to be reflected in retail energy prices," read the minutes. "Some inflation risks remained."

The Fed did appear to concentrate much of its discussion on the disruptions in financial markets. The Fed highlighted concerns that credit availability was limited, housing market problems had intensified, liquidity in short-term funding markets was scarce, and large losses at financial institutions had the potential for an economic impact.

The Fed made note that the market expected the central bank to slash rates, or help out in some way, but that they also noted the lag effects of the already 75 basis points of easing the central bank had already done.

Members "recognized the economic outlook was unusually uncertain," read the minutes. "Financial stresses could increase further," said the central bank. Or, "financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might be appropriate," read the minutes.

The minutes did make mention of the Dec. 12 announcement of the concerted effort by several global central banks to inject liquidity into the financial system to aid institutions through the critical and liquidity-challenged year-end period. The four $20 billion or more liquidity efforts through a Term Auction Facility was discussed at a Dec. 6 conference call and aimed "at improving market functioning," read the minutes.

The liquidity solution, and overall, coordination with other global central banks was largely considered a positive, though there were discussions about potentially damaging incentives created by such auctions in the long run.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.

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