U.S. Stocks Slide Again Despite Fed Aid

Investors woke up on Friday morning, rolled out of bed, grabbed a cup of coffee, read over the headlines....and panicked.

Anxiety gripped the U.S. financial markets as the Federal Reserve injected cash into the market and there were renewed concerns about cracks in credit.

The central bankers announced a three-day repurchase agreement to pump cash into the banking system. The New York Federal Reserve Bank said it accepted repos, a form of short term lending, for $19 billion in mortgage-backed securities, at an average rate of 5.24%. That decision came after the federal funds rate, which is what commercial banks charge eachother for overnight loans, climbed above 6% again Friday, which is above the Fed's target of 5.25%.

The Federal Reserve Board said it was providing liquidity to facilitate the orderly functioning of financial markets.

"In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets," the central bank said. "As always, the discount window is available as a source of funding."

Although trading in interest-rate futures indicated the opposite, the Fed seemed to be saying it had no interest in reducing its target on the federal funds rate from 5.25%. Instead, it was ensuring that banks could obtain enough money at that level to facilitate the normal functioning of the banking system, while not offering a bailout to borrowers who have larger mortgages than they can afford nor to the hedge funds and other investors who bought securities based on those home loans.

Investors responded with a bolt of anxiety to the move and quickly moved to sell shares. In morning traders, the Dow Jones industrial average was down 138.85 points, or 1.1%, to 13,131.83.

"There is a lot of nervousness out there," said Zach Pandl, economist at Lehman Brothers. "People are uncertain as to what the Fed statement means. Our take is that they are trying to instill confidence. But they're not talking about rate cuts. They're taking a proportional response. They are just trying to stabilize and soothe markets.

The U.S. financial markets have moved like a fast-moving roller coaster recently, dramatically swinging up and down as investors worried day-to-day that the access to easy credit is over. Cheap financing has helped motivate those headline-grabbing takeovers that proved to be one of the pillars of the U.S. stock market in the past year.

There are of course also concerns that problems plaguing the subprime mortgage market, those home loans made to folks with weak credit, have now moved up the credit ladder and are impacting higher-quality mortgages.

Those fears weren't assuaged on Friday, when Countrywide Financial (nyse: CFC - news - people ), the largest mortgage lender in the U.S., told Wall Street that disruptions in credit and secondary mortgage markets could bang up the company's financial standing in the short-term.