Stocks Rebound After Fed Adds Liquidity

Stocks Pare Losses After Fed Adds Liquidity, Indexes at Times Move Into Positive Territory

NEW YORK (AP) -- Wall Street pared its losses Friday after the Federal Reserve said it would do all it can to "facilitate the orderly functioning of financial markets" and twice injected liquidity into the banking system.

The stock market, which has been gyrating for weeks over fears that credit is drying up, began to pare its losses several hours after the Fed's latest injection of cash into the system Friday. The day's declines, however, showed the depths of fear that have investors yanking money out of stocks.

The Fed added $16 billion in liquidity to the market at midmorning Friday, supplementing the $19 billion added earlier in the day.

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, 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.

In midday trading, the Dow Jones industrials fell 37.48, or 0.28 percent, to 13,233.20, after being down as much as 212 points and briefly moving into positive territory. 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. As of Thursday's close, the Dow was down about 730 points, or 5.2 percent, from its record close.

Broader stock indicators also pared their losses from earlier in the session. The Standard & Poor's 500 index slipped 0.22, or 0.02 percent, to 1,452.87, and the Nasdaq composite index fell 8.74, or 0.34 percent, to 2,547.75.

On Friday, the New York Fed, which carries out the central bank's market operation, announced a three-day repurchase agreement and then a second "repo" to inject liquidity into the market. The Fed said Friday it would accept $19 billion and then $16 billion in mortgage backed securities. The move came after the fed funds rate, the rate banks charge each other for overnight loans, ticked above 6 percent again Friday -- well above the Fed's target of 5.25 percent and a sign that credit was becoming harder to obtain.

The Fed stepped in after the same occurrence Thursday, injecting a larger-than-normal $24 billion in temporary reserves to the U.S. 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 Thursday and Friday follow its August meeting Tuesday at which it left short-term interest rates unchanged at 5.25 percent, as it has done for more than a year. In its statement following the meeting, the bank said its primary concern remains inflation.

But the tumultuousness of the final two sessions of the week, which followed a sharp run-up in the week's first three sessions, has some market observers wondering whether the Fed will step in and douse some of the credit fears that have gripped the markets. So while some are now calling for a rate cut at the Fed's September meeting or even sooner, others contend investors will in any case first need to gather some confidence that the subprime woes and the credit market tightening aren't lethal for the economy and the markets.

"The confidence will be restored over time if the economy and the financial markets are resilient enough to overcome these kinds of announcements and view them in isolation," Miller said. "I think it's premature to forecast a recession, particularly if the Fed is responsive. There is no reason why we couldn't work our way out of this fairly quickly."

However, he thinks subprime unease is likely to continue, particularly this fall as a big batch of subprime mortgages written in 2005 and 2006 begin to reset their rates.

"I think other shoes will drop simply because of the size of the lending that went on in the subprime sector, the upcoming resets and the tightening of credit standards."

But regardless of how quickly it might be restored, investor confidence worldwide has been shaken. In Asia, stocks fell Friday after regulators including the Bank of Japan added liquidity. The European Central Bank for the second day added cash to its money markets.

These banks and others around the world haven't worked together to inject liquidity into the markets since the aftermath of the Sept. 11, 2001, attacks. But the measures, intended to keep financial markets well-oiled, also seemed to confirm investor fears of a larger problem in the credit markets that will stall corporate growth -- including the burst of takeover activity that powered stocks higher this year.

Overseas, Japan's Nikkei stock average fell 2.4 percent. Hong Kong's Hang Seng Index fell 2.9 percent. Britain's FTSE 100 fell 3.71 percent, Germany's DAX index fell 1.48 percent, and France's CAC-40 fell 3.13 percent.

Bonds rose again Friday as investors again sought the relative safety of Treasurys. The yield on the benchmark 10-year Treasury note fell to 4.77 percent from 4.79 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

The concerns about credit and the effect of subprime loans, those made to borrowers with weak credit, were undiminished Friday, perhaps in part because of comments from Countrywide Financial Corp.

The nation's biggest mortgage lender fell $1.64, or 5.7 percent, to $27.02 after saying in a regulatory filing Thursday that disruptions in credit and secondary mortgage markets pose a risk to the company and could hurt its financial standing in the short-term. Earlier in the week, Countrywide said it still has access to capital despite the credit crunch.

Credit concerns unnerved investors not only for the deals that such difficulties could prevent but also for deals in the works that could be derailed.

ABN Amro Holding NV had been down sharply early and was recently off 58 cents at $46.54 amid worries that one or both of two competing bids for the company might fall apart. ABN fell as investors appeared to re-evaluate risk that a bid from Fortis NV, part of a consortium led by Royal Bank of Scotland PLC, could lose out to a bid from Barclays PLC, or that both could fail. However, Fortis' chief executive said he was "very confident" about financing the ABN deal, according to Dow Jones Newswires.

In economic news, the Commerce Department said U.S. import prices rose for a fifth consecutive month in July, increasing 1.5 percent. Prices rose in part amid increased energy costs. The figures could stir concern among the Fed about inflationary prices.

Light, sweet crude fell 85 cents to $70.74 per barrel on the New York Mercantile Exchange.

Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange, where volume came to 1.33 billion shares.

The Russell 2000 index of smaller companies turned positive, rising 6.99, or 0.89 percent, to 791.86.

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