Fed calms investors after week of wild stock swings

Wall Street closed out an extraordinarily difficult week with a mixed finish Friday 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 in the session, ended with just a 30-point deficit.

The stock market, which has been gyrating for weeks over fears that credit is drying up, pared its losses after the Fed's second injection of cash and 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 yanking money out of stocks.

The Fed added $19 billion in liquidity to the market Friday morning, then another $16 billion and, in midafternoon, $3 billion.

Federal Reserve policymakers "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, N.Y.

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.

The Fed stepped in Friday after injecting a larger-than-normal $24 billion in temporary reserves to the U.S. banking system on Thursday.

The Dow closed down 31.14, or 0.2%, at 13,239.54. On Thursday, the Dow fell 387 points and extended a series of triple-digit moves that began in late July.

Friday's moves were typical of the zigzag 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 1453.64, and the Nasdaq composite index fell 11.60, or 0.5%, to 2544.89.

All three indexes still finished higher for the week: The Dow rose 0.4%, the S&P advanced 1.4% and the Nasdaq added 1.3%. Sharp gains Monday, such as the Dow's 287-point climb, left stocks better able to weather Thursday's plunge.

Bonds slipped as investors traded the relative safety of Treasurys for stocks late in Friday's session. The yield on the benchmark 10-year Treasury note rose to 4.80% from 4.79% late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

Central banks worldwide have now injected at least $326 billion in the past 48 hours to prevent markets from spinning into a global liquidity crunch. Short-term interest rates spiked in response to banks' decreased willingness to lend to each other.

Before U.S. stock markets opened Friday, the Fed tried to reassure investors that it would pump extra money into the U.S. financial system to make sure the credit crunch doesn't worsen.

The Fed announced a three-day repurchase agreement, or "repo," to inject liquidity into the market and issued a statement saying it would "provide reserves as necessary" to keep the federal funds rate near its 5.25% target.

The fed funds rate gauges how much demand there is for short-term money. If that rate greatly exceeds the Fed's target rate, the central bank puts money into the system to stabilize that demand.

In a repo, the Fed arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks.

Early Friday, the Fed said it would buy $19 billion in mortgage-backed securities after the fed funds rate, the rate banks charge each other for overnight loans, ticked above 6%.

In addition to the $19 billion in mortgage-backed securities, the Fed said it was also accepting eligible Treasury and agency collateral.

The central bank did not comment on why it was accepting more mortgage-backed securities than usual, but it's possible that the Fed was trying to remove some of the stigma that these assets currently hold in the financial markets.

The free flow of credit is important to the smooth functioning of any economy. Increasingly restrictive lending conditions can put a damper on people's ability to buy big-ticket items such as homes, cars and appliances. And it can crimp businesses' capital investment and hiring. That reduced appetite by businesses and consumers would slow overall economic activity.

Asian and European stocks fell sharply as fallout spread from global market turmoil set off by concerns about credit weakness in the U.S.

Overnight, the Nikkei 225 index dropped 406.51 points, or 2.4%, to close at 16,764.09 points on the Tokyo Stock Exchange. The broader Topix index, which includes all shares on the exchange's first section, fell 49.88 points, or 3%, to 1,633.93.

In Europe, shares tumbled 3%, their biggest one-day fall in more than four years. London's FTSE 100 stock index dropped 3.7%, the CAC-40 in Paris fell 3.1 and Germany's DAX index was down 1.5%.