Because of the unusual structure of the FOMC, it is difficult to bring change rapidly. The regional banks' governors represent their areas, and if no one is hurting, they are unlikely to suggest loosening. Those appointed by President Bush are moderate inflation hawks, and will need to hear how the real economy is suffering before they decide to act. A mere financial crisis where we aren’t even in a bear market yet is not enough to goad action, particularly when none of the major commercial (not investment) banks are under threat yet.
Tell me, what regulated depositary institution is under threat at present? Those are what the Fed cares about. They could care less if hedge funds and non-bank lenders go under, so long as the banks aren’t affected. Failures of non-bank lenders help the Fed in monetary policy, as less lending is outside of their control.
I don’t see the FOMC loosening in 2007. That was a non-consensus view in December 2006, when I first said it, which became consensus (and I worried), and is now no longer consensus any more. Inflation is still a threat, the real economy is not weak, but the FOMC does not want to tighten, because of risks in the financial markets. We stay on hold, though the FOMC may soften language, as a sop to the financial markets.