One thing we have to realize is that the Federal Reserve does not always react when it is obvious to those of us that see what is going on in the trenches! The FED today has now reacted to the situation :

"The Federal Reserve, in a statement that underscores the deepening severity of developments in credit markets, said it is "providing liquidity to facilitate the orderly functioning of financial markets," and will pump enough money into credit markets to keep the Fed's target for the federal funds interest rate at 5.25%. U.S. federal-funds futures early Friday priced in about a 100% chance that the Federal Reserve will reduce its key lending rate by a half-percentage point to 4.75% by the next policy meeting on Sept. 18." ...from The Wall Street Journal on August 19,2007

One thing to remember is that no matter what the FED does, it takes time to see the effects and it always overdoes everything. If it is in a 'raise rates' mode, it usually raises them too high. It makes it's decisions based on lagging indicators. There is no quick fix.

The FED action today (injecting money into the system) was done primarily to help stabilize the Mortgage backed securities market. Their next move will most likely be to reduce interest rates, currently standing at 5.25%. This is the rate banks charge each other on overnight loans.