Fed's cash injection steadies Wall Street

Wall Street closed out a difficult week with a mixed finish tonight after the Federal Reserve injected billions of dollars into the banking system to calm markets torn by worries about evaporating credit.

The Dow Jones industrials, down more than 200 points during the session, ended with just a 31-point deficit and managed to post a gain for the week.

The stock market, which has been gyrating for weeks over fears that credit is drying up, pared its losses after the Fed’s injections of cash and following morning comments from the central bank that it would do all it can to “facilitate the orderly functioning of financial markets.”

The day’s declines and continued volatility, however, showed the depths of fear that have investors removing money from stocks.

The Fed added 19 billion dollars in liquidity to the market this morning, then another 16 billion dollars and, in mid-afternoon, 3 billion dollars.

Federal Reserve policy makers “are trying to do everything they can short of cutting the federal funds rate” to try to calm the markets, said Ed Yardeni, president of Yardeni Research in Great Neck, New York.

But, he said: “I think they probably have to cut rates, and probably before their scheduled September meeting.”

He noted that it was Fed rate cuts that calmed the market after the 1998 Russian debt crisis and the implosion of the hedge fund Long-Term Capital Management.

According to preliminary calculations, the Dow closed down 31.14, or 0.23%, at 13,239.54. Yesterday, the Dow fell 387 points and extended a series of triple-digit moves that began late last month.

Today’s moves were typical of the zig-zag trading and triple-digit moves in the Dow since the index closed at a record 14,000.41 on July 19. The Dow is down about 761 points, or 5.4%, from its record close.

Broader stock indicators finished mixed. The Standard & Poor’s 500 index edged up 0.55, or 0.04%, to 1,453.64, and the Nasdaq composite index fell 11.60, or 0.45%, to 2,544.89.

The New York Fed, which carries out the central bank’s market operation, announced a three-day repurchase agreement and then two more “repo” moves to inject liquidity into the market.

The Fed said today it would accept 19 billion dollars and then 16 billion dollars in mortgage backed securities. The move came after the fed funds rate, the rate banks charge each other for overnight loans, ticked above 6% again today – well above the Fed’s target of 5.25% and a sign that credit was becoming harder to obtain.

The Fed stepped in after the same occurrence yesterday, injecting a larger-than-normal 24 billion dollar in temporary reserves to the US banking system. In a repo, the Fed arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks.

“It’s encouraging because it’s a proactive step and they’re not just focused on the inflation numbers and not ignoring turmoil in the credit market,” said John Miller, head of the fixed income funds at Nuveen Asset Management.

The Fed’s moves yesterday and today follow its August meeting on Tuesday at which it left short-term interest rates unchanged at 5.25%, as it has done for more than a year. In its statement following the meeting, the bank said its primary concern remains inflation.