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 yanking money out of stocks.
The Fed added $19 billion in liquidity to the market Friday morning, then another $16 billion and, in mid-afternoon, $3 billion. The injections of cash were something the Fed hasn't done since the Sept. 11 attacks in 2001, reports CBS News correspondent Kelly Wallace.
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.
The Dow closed down 31.14, or 0.23 percent, at 13,239.54. On Thursday, the Dow fell 387 points and extended a series of triple-digit moves that began in late July. 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 percent, from its record close.
Broader stock indicators finished mixed. The Standard & Poor's 500 index edged up 0.55, or 0.04 percent, to 1,453.64, and the Nasdaq composite index fell 11.60, or 0.45 percent, 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 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.
The injections of cash "certainly soothed things a little bit," Art Cashin is director of floor operations for UBS Financial Services, told CBS Evening News anchor Katie Couric. "The Fed entered the marketplace about three different times to add liquidity to the banking system. The real question is, where does that money go? Does it go to the hedge funds? Does it go to the people who need money to fund some of that collateral? Will it spread to the places who have problems?