She willingly kept the children at home and asleep to not subject them to what was going on. Pretty sure she knew.
This isn't exactly true, she did bring out the kids when she needed them for her own kids to have Halloween.
I think the issue is, Wanda knew she was controlling them, but didn't understand the extent of how she was controlling them. This isn't the best analogy, but I think she saw them as ants in an ant farm. She felt she kept them safe, fed, gave them everything she could, like better houses, better jobs, etc, but that they were still doing their own things. Remember, her mental powers up to this point were not about literal control, but instead persuasion, like sending Hulk into a rampage or giving the Avengers nightmares. She thought all the people were still "living a life", just one that she "nudged" like some kind of benevolent dictator. What she didn't understand was she was literally controlling everything they did, so much so that people on the edge of town existed like statues since they were not needed by the plotlines.
It was the finale where she finally realized the extent of her influence, and that was what freaked her out. She literally thought Agatha was mind controlling the town because she didn't realize how much she had been mind controlling them herself ("What are you doing to them?" "Their your meat puppets, I am just cutting the strings."). All the people she mainly interacted with, Vision, the Kids, Agatha, and Ralph, were never ever fully under her control, and thus they set the template she thought all the others existed as.