On Friday, the Fed released a series of transcripts of high-level meetings between policymakers through 2007, and the documents paint a picture of an agency that was guarding its language publicly, but expressing serious concern behind closed doors.
"The odds are that the market will stabilize," Fed chair Ben Bernanke told a meeting of his counterparts in August 2007. In hindsight, GDP growth was already beginning to slow. But the full force of the financial crisis had yet to be felt.
In the public statement that followed that meeting, the Fed said it was ready to provide funds "as necessary" to ensure American businesses and consumers would have access to enough credit to keep the economy lubricated.
The mortgage market in particular had already turned the corner and moved south, as the first wave of American homeowners to default on their subprime mortgages had already started, although it remained small.
The issue of banks getting their fingers burned by bad mortgages, however, was starting to trickle into the real economy, as businesses and consumers saw lending start to dry up.
"Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to non-financial businesses and to the vast majority of households that can service their debts," said Donald Kohn, the Fed's vice-chair at the time.
As for the mortgage market, there are myriad instances of officials failing to see the tidal wave already underway.
At a meeting in October 2007, Federal Reserve Bank of Dallas president Richard Fisher acknowledged the crisis underway in America's housing market, but insisted that perception was not matching up with reality.
"The situation remains real, but we’ve gone beyond suspended reality," he said.
"If you will forgive me, you might say we have gone from the ridiculous to the subprime," he said, which drew groans from the other members.
Not that he dismissed the impact entirely. Indeed, he suggested he expected it to continue to unwind in investors' portfolios for some time to come.
"I am confident, as I have said in previous meetings, that — just to be polite — some cow patties might show up in the punchbowls of some portfolios," he continued.
Other meetings showed a similar downplaying of the crisis that was to come.
"In contrast to the partial recovery in non-prime mortgages … we are expecting a full recovery in jumbo mortgages to occur by early 2009," Federal Reserve economist Dave Stockton told the board in a closed door meeting on Sept. 18, 2007.
Official data now shows the U.S. slowdown in house prices started sometime in 2006 and wouldn't crater until 2009, when the Case-Schiller U.S. home price index was still showing yearly declines of nearly 20 per cent in America's largest housing markets.
"We also assume that there will be some hit to consumer sentiment," he continued. "The restraint imposed by these factors is assumed to fade over the next year."
Beyond America's borders, the documents reveal policymakers' thoughts at the time failed to grasp the enormity of the situation to follow.
"We have no indications from our supervisory counterparts that any major institution in Europe is facing a significant solvency problem now," Timothy Geithner said in August 2007, according to the documents. Geithner later became Treasury secretary but at the time was just one of many Federal Reserve board members.
European banks were able to delay the brunt of their own financial crisis for a time after America's was well underway. But by 2010, the continent's biggest lenders were in the middle of a debt crisis from which they have yet to emerge.