Stocks Edge Up After Fed Adds Liquidity

NEW YORK -- Stocks recovered some ground Wednesday, drawing some reassurance from the Federal Reserve's announcement that it was adding more cash to the banking system.

The market changed course several times in early trading amid conflicting announcements from the New York Fed over its plans to make a repurchase agreement — in which it arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks.

Ultimately, the Fed said it would buy $7 billion, following the Canadian central bank's announcement that it has temporarily expanded the list of eligible collateral it will accept when it makes injections. Central banks worldwide have supplied billions of funds to banks over the past week to make cash available for lending and keep interest rates stable amid signs that credit was drying up.

Now, Wall Street is curious if the Fed will cut interest rates at its Sept. 18 meeting. On Wednesday, the Labor Department said its Consumer Price Index — a gauge of price inflation on food, energy and consumer products — rose 0.1 percent in July, meeting the consensus forecast of economists polled by Thomson Financial.

Price pressures have been keeping the Fed from lowering rates — a move that would free up more cash and that could trigger a rally in the Dow, which is now nearly 1,000 points below its record close in mid-July above 14,000.

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"Yes, the market would probably move dramatically higher if they made a cut," said Linda Duessel, market strategist at Federated Investors in Pittsburgh. "But I think it's more prudent to allow this correction to continue to unfold. After all, we're in the month of August and coming into September — historically, the weakest months of the year. The market has been in need of a correction."

In late morning trading, the Dow Jones industrial average was up 15.61, or 0.12 percent, at 13,044.53, after briefly trading below 13,000 for the first time since April 25. The Dow fell more than 200 points on Tuesday, resuming a weeks-long series of triple-digit moves following a one-day reprieve Monday.

Broader stock indicators also rose. The Standard & Poor's 500 index was up 5.10, or 0.36 percent, at 1,431.64, and the Nasdaq composite index was up 6.77, or 0.27 percent, at 2,505.89.

Bonds were little changed, with the yield on the benchmark 10-year Treasury note at 4.73 percent, the same as late Tuesday. Gold prices retreated, while the dollar rose against the euro and British pound.

Stock gains were fairly modest, though, as Wednesday is the last day for many investors in hedge funds to submit redemption notices for the third quarter. On Tuesday, Sentinel Management Group, which manages $1.6 billion, said it was halting redemptions. That suggests heavy losses, which could trigger further selloffs in the stock market.

Wall Street is also nervous about consumer spending. The potential for a slowdown in consumer spending — which has been a major driver of the economy — has compounded investors' worries over a shrinking of available credit due to widespread problems in the subprime mortgage market.

Department store chain Macy's Inc. on Wednesday said second-quarter profit fell short of its initial expectations, which were lowered in July. But Chairman, President and Chief Executive Terry J. Lundgren said in a statement he is optimistic business will improve in the second half of the year "despite what appears to be a more challenging economic environment."

Macy's rose 72 cents, or 2.3 percent, to $32.45.

Financial stocks saw more stability Wednesday. A fund controlled by billionaire investor Edward Lampert reported Tuesday it has upped its stake in Citigroup Inc. Citigroup, one of the 30 Dow components, rose 69 cents, or 1.5 percent, to $46.33.

Light, sweet crude rose 85 cents to $73.24 on the New York Mercantile Exchange, as Tropical Storm Dean strengthened in the Caribbean and headed west — posing a potential, if still distant, threat to oil producers and refiners along the Gulf of Mexico.

The Russell 2000 index of smaller companies was up 8.55, or 1.12 percent, at 771.42.

Declining issues narrowly outnumbered advancers on the New York Stock Exchange, where trading volume came to 575.9 million shares.

Overseas, Japan's Nikkei stock average slid 2.19 percent. In afternoon trading, Britain's FTSE 100 lost 0.60 percent, Germany's DAX index rose 0.15 percent, and France's CAC-40 dropped 0.59 percent.

Editor's note:
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