Aug. 13 (Bloomberg) -- The Federal Reserve added $2 billion in temporary funds, the smallest such action in more than three months, suggesting the central bank's $62 billion injection at the end of last week met market demand for cash.

When the Fed injected cash through overnight repurchase agreements, or repos, the funds traded at the bank's target of 5 1/4 percent. The Fed earlier said in a statement that it ``stands ready to conduct additional operations later in the day as needed.''

The European Central Bank added emergency funds to the banking system for a third trading day and said money markets are returning to normal. Central banks in Japan and Australia, which joined the ECB and the Fed in pumping cash into their markets last week, today refrained from providing additional funds. Stocks advanced in Asia and Europe and the U.S.

``The Fed is confident that the $2 billion is sufficient for the Fed funds to trade close to its target,'' said Ken Kim, an economist at Stone & McCarthy Research Associates in Skillman, New Jersey. ``They may step in again if the funds continue ticking up.''

The Fed funds, or the overnight lending rate banks charged each other, began trading at 6 percent on Aug. 10, the highest opening price since January 2001 amid concern that U.S. subprime mortgage losses will curtail lending. The ECB, the Fed and other central banks injected $154 billion into money markets on Aug. 9 and $135.7 billion on Aug. 10.

European Central Bank

The ECB loaned 47.7 billion euros ($65 billion) to banks today, down from 61.05 billion euros on Aug. 10.

The New York Fed injected cash at the usual open-market operations time of 9:30 a.m. in New York. The Fed pumped in $38 billion on Aug. 10 and $24 billion on Aug. 9, both earlier than usual.

``In circumstances like this, one of the first goals for a central bank is to try to restore a sense of normalcy,'' said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey. ``The condition in the euro-dollar market is much more orderly this morning, allowing the Fed funds market to open much softer. This gives them an opportunity to start returning to a normal schedule.''

Under normal market conditions, the Fed needs to inject $7 billion to keep the Fed funds close to its target, according to Wrightson ICAP, a research unit of ICAP Plc, which is the world's largest inter-dealer broker.

Anything less than a $7 billion injection ``suggests they are offsetting what they did last week,'' Crandall said.

`Token Injection'

Fed funds may decline later today due to the excessive reserves after last week's operations, according to a report by Wrightson.

``The token injection should reassure the market that the Fed won't be reluctant to provide morning reserves just because of the prospect of an evening collapse in funds,'' said the report.

After the Fed's operation on Aug. 10, the funds traded close to zero percent, pushing the weighted average to 4.68 percent, according to the central bank.

The London interbank offered rate on the dollar fell to 5.77 percent from Aug. 10, when it was 5.96 percent, the highest since January 2001, the British Bankers Association said.

Fed Getting Its Way

The drop in the level of the Fed funds rate ``suggests to me the market is expecting the Fed to be able to get what they want,'' said Ray Stone, another economist at Stone & McCarthy Research.

In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.

Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target. They don't signal a policy shift.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net.

Last Updated: August 13, 2007 11:55 EDT