Fed adds $6 bln in reserves through 3-day repos

NEW YORK (Reuters) - The U.S. Federal Reserve said on Friday it added $6 billion of temporary reserves to the banking system through 3-day repurchase agreements in what analysts viewed as more in line with the size of normal operations.

By contrast, last Friday the Fed injected $38 billion of temporary reserves to the system as global central banks sought to ease short-term lending conditions in turbulent credit markets worldwide.

Friday's open-market operation followed the Federal Reserve's cut of the primary discount rate by half a point to 5.75 percent, calling that move a temporary change. The policy-setting Federal Open Market Committee said the risks to growth slowing have increased appreciably.

Overnight lending rates were fairly steady in the market by comparison with sharp gyrations during recent sessions.

"Today's operation looks like bringing the funds market a step closer to normalcy," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.

The Fed said the collateral accepted on the $6 billion 3-day repurchase was made up of $300 million of agency debt and $5.7 billion of mortgage-backed securities. A total of $71.45 billion in bids were submitted for the 3-day repurchase.

"I don't think the operation in and of itself was a surprise, and I don't think we can make much ado of the actual magnitude either," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in Purchase, New York.

"Six billion dollars is sort of treading the line. This was not the Fed coming in and hitting us over the head again (with bigger than usual additions to the banking system)," Flanagan said.

Federal funds, the benchmark overnight lending rate to banks, last traded at 5.125 percent, below the Fed's targeted 5.25 percent rate and below 5.19 percent early on Friday before the Fed operation.

"The fed funds market has two phases every day: we are still in the phase where the emphasis is on intraday liquidity, people are not picky about what they pay to get their funding done," and for now that will put upward pressure on federal funds rates, said Crandall.

But after about 3 p.m. (1900 GMT) banks may start to offload excess reserves they do not need for the weekend and that may lower where federal funds are trading, though not as far as the 2 percent intraday low recorded on Thursday, Crandall forecast.

The effective rate for where federal funds traded in the market, an average for the day's trading, was 4.97 percent on Thursday, according to New York Federal Reserve data. The highest intraday that federal funds traded on Thursday was 5.375 percent, while the lowest traded level was 2 percent, according to the New York Fed.

That's up from the lowest levels of zero percent on August 10 and August 13, the first occasions since at least 1993 federal funds have traded that low in the market, according to some analysts.