Fed misjudged signs of crisis in 2007 Federal Reserve officials in August 2007 saw the beginnings of the crisis in subprime mortgages and concluded that the U.S. economy would be able to withstand it, even as some Fed members warned that it could bring a downturn, transcripts from their 2007 meetings show. "Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to nonfinancial businesses and to the vast majority of households that can service their debts," Donald Kohn, then vice chairman of the board, said in August 2007, according to transcripts of the Federal Open Market Committee meetings released Friday in Washington. The transcripts show the committee's slow grasp of the enormity of the contagion that was to spread throughout global markets as a result of billions of dollars in low-quality housing assets that had been securitized into bonds and sold to banks and investors worldwide. Lending rate unchangedU.S. central bankers kept their benchmark lending rate unchanged at their regularly scheduled meeting on Aug. 7, 2007, saying in a statement: "The predominant policy concern remains the risk that inflation will fail to moderate as expected." "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst," Yellen said. Rising defaults in subprime could spread to other sectors of the mortgage market and could trigger a vicious cycle in which a further deceleration in house prices increases foreclosures. The Fed board announced a half percentage point cut in the discount rate Aug. 17 to 5.75 percent, and the following month cut the federal funds rate by a half percentage point to 4.7 percent.